April the 13th, 2026 – Europe is being threatened economically, with Croatia being among the countries at serious risk of “stagflation” – a situation in which unemployment is high, inflation is high, and growth is stagnant.
As Poslovni Dnevnik/Edita Vlahovic Zuvela writes, stagflation, a once almost entirely forgotten term from the 1970s, has returned to the European lexicon as a result of the Iran war and the resulting fuel and energy shock. The combination of slowing growth and rising inflation is creating an uncomfortable scenario for which neither economies nor central banks have easy answers.
The European Commission (EC) has already acknowledged that this year’s forecasts will have to be revised downwards: the conflict across the Middle East is pushing up energy prices, fuelling inflation and dampening consumption and investment. The question is not just whether Europe will avoid a recession, but how it will balance the necessary support for the general public with the strict fiscal discipline rules that have been re-imposed.
Higher oil and fuel prices are pushing up production and transport costs, which is reducing consumption and slowing investment way down. Economy Commissioner Valdis Dombrovskis has therefore been speaking openly about a “stagflation shock” and is preparing the ground for revised forecasts in May.
croatia is at particular risk from stagflation
“If pressures surrounding stagflation in particular do end up materialising, Croatia would be particularly exposed due to its structural position. Already relatively high inflation compared to the Eurozone average indicates the presence of strong cost and import pressures, which would further intensify in such a scenario,” Saša Drezgić from the Faculty of Economics in Rijeka warned.
He added that Croatia is very highly dependent on imported goods, which means that price increases on international markets are relatively quickly passed on to local prices, “therefore reducing the real purchasing power of the general population and increasing uncertainty across the entire business sector.”
“An additional layer of vulnerability arises from the pronounced dependence on imported energy products, which makes the Croatian economy particularly sensitive to possible new price shocks on global energy markets, with direct implications for production costs and the overall price level,” stated Drezgić.
revised growth…
The EC had previously forecast growth of 1.4% this year and 1.5% in 2027, with inflation slightly above 2%. However, recent economic scenarios conducted by the EC estimate that growth could slow by up to 0.4% this year if energy prices return to their pre-conflict levels by the end of 2026, according to the Financial Times. If high energy prices persist for longer, the slowdown could reach 0.6% over both this year and the next. Inflation, according to the same models, could rise between 1 and 1.5% above previously projected levels.
“A slowdown in economic activity at the EU level would have significant indirect effects on the Croatian economy, primarily through reduced external demand and potentially weaker tourism performance. Given the structure of the Croatian economy and its reliance on services and foreign demand, such disruptions would be multiplied across a range of sectors, with possible consequences for the labour market, which could show signs of slowing employment and wage dynamics in a prolonged period of weaker growth,” warned Drezgić.
what does the european central bank say?
The European Central Bank (ECB) still expects inflation of around 2.6% and growth of 1.9% this year in its baseline scenario. In a stress scenario, however, prices could rise above 6% by 2027, far from the 2% target.
Boris Vujčić, the governor of the Croatian National Bank and since June the vice-president of the ECB, warned in a recent interview with Bloomberg that “we aren’t currently seeing stagflation, but we’re moving in that direction”, and how far Europe will go will depend almost exclusively on the duration and intensity of the Middle Eastern conflict. The longer the war keeps energy expensive, the more likely it is that the ECB will have to keep or even raise interest rates despite weaker growth, which increases the risk of recession.
The pressure is already spilling over to businesses and households: higher energy prices are increasing costs, reducing real incomes and postponing investment, while consumer confidence and employment expectations are slipping below average. If this concerning trend continues, Europe could enter a spiral in which inflation “eats” real wages and weak activity hinders any kind of subsequent recovery.
“In such a context, fiscal policy would face pronounced constraints. The need to mitigate the social and economic consequences of inflation and the slowdown in growth would require additional interventions, while at the same time preserving fiscal stability and credibility would represent an important restrictive framework. For this reason, the key response cannot be exclusively short-term, but must include a clearly focused medium- and long-term development approach,” Drezgić explained.
He added that the drafting of the industrial strategy that is currently being worked on is of particular importance in this regard. “In conditions of increased uncertainty and external shocks, it becomes necessary to systematically strengthen the local production base, reduce dependence on imports, especially in the goods and energy segments, and increase the overall resilience of the economy.” In order for such a strategy to have a real impact, it is crucial to secure adequate financial resources for its implementation, thus moving on to the operational transformation of the economy.
the 1970s taught us how costly (and long) these episodes can be
The 1970s is proof of just how long-lasting and costly such episodes can be. Back then, the oil embargo quadrupled crude oil prices. Today’s shock is much more mild: oil prices have risen by about 50% since the beginning of the conflict with Iran, while the previous Russian-Ukrainian shock was indeed stronger, but it comes after a series of crises and already exhausted fiscal and monetary instruments. In such an environment, any additional escalation can trigger a scenario in which neither growth accelerates nor inflation eases.
Governments are trying to cushion the blow with targeted measures: fuel tax cuts, energy subsidies. Dombrovskis warned that excessive consumption can easily turn an energy crisis into a fiscal crisis, especially today when there is less room for flexibility than during the coronavirus pandemic. In June, the EC will assess whether the EU nations have successfully met their debt and deficit trajectories, and excessive deficit procedures will once again hang over countries that postpone such consolidation. In a scenario of slow growth and stubborn inflation, fiscal mistakes are more quickly punished by both the markets and by Brussels itself.
For Europe, this means that in the coming months there will be a race between diplomacy and energy, monetary policy and the real sector. As stated, Croatia is at high risk of stagflation, and this actually all boils down to the need to simultaneously manage inflationary pressures and preserve economic activity, with the quality of economic policy coordination and the ability to implement structural adjustments playing a key part in it all.
If the ceasefire in the Middle East becomes permanent and succeeds in stabilising the markets, Croatia facing a pronounced risk of stagflation rmay gradually recede. In the wider context, this would also give the ECB and individual national governments room to gradually return to a more “normal” policy regime. If, however, the war is prolonged or expanded, policies will have to simultaneously quell inflation and support growth, and it is precisely this combination that makes stagflation the most unpleasant scenario for the European economy.
