Spain Faces Economic Pressure as Middle East Conflict Drives Up Energy Costs

Madrid – The Spanish government is actively developing a package of economic measures to address the consequences of the ongoing conflict in the Middle East, particularly the escalating energy prices. Simultaneously, business groups, labor unions, and various economic sectors are presenting demands to the government, many centered around tax reductions. Following a series of political consultations between the Ministry of the Presidency and parliamentary parties, representatives from major unions and employer organizations – CCOO, UGT, CEOE, and Cepyme – are scheduled to meet with the Spanish economic ministries at the Ministry of Economy on Thursday morning.

Fuel Tax Relief Demanded

The Catalan business association Pimec, for example, has urged a temporary reduction in fuel taxes to contain inflation and protect the liquidity of tiny and medium-sized enterprises (SMEs) in the face of rising diesel prices. The organization warned in a statement that the sudden increase in diesel costs is already impacting Catalonia, particularly in sectors like transport and logistics, which are largely comprised of SMEs, and that higher fuel prices could spread throughout the economy. The Ministry of Transport met with road transport representatives on Wednesday afternoon to address issues stemming from the conflict. Earlier, the Minister of Economy, Carlos Cuerpo, and the President of the National Commission on Markets and Competition (CNMC) met to analyze potential “anomalous” situations related to rising fuel prices and how to detect them.

Electricity Bills Under Scrutiny

Executives from the Basque metallurgical company Sidenor, a significant energy consumer, and Iberdrola are also focusing on taxes. At a forum in Bilbao, representatives from both companies called for a reduction in electricity tax rates and even the elimination of the 7% tax on electricity generation, which the Spanish government temporarily suspended in 2021 during a previous surge in prices. Iberdrola, led by Ignacio Sánchez Galán, has repeatedly advocated for the removal of this tax, even outside of crisis situations. The hospitality sector is also proposing tax adjustments for both fuels and electricity.

Food Prices Also at Risk

Beyond energy, rising commodity prices will also impact food costs. Following Mercadona’s proposal to reduce VAT on food to 0% – a measure not embraced by Antonio Garamendi, president of the Spanish employer organization CEOE – the Spanish federation of fishermen and frozen food products has also called for a tax adjustment on seafood, currently subject to a 10% VAT, “before prices increase.”

A key factor in potential food price increases lies in fertilizers. The Middle East, via the Strait of Hormuz, exports not only gas and oil but also manufactured fertilizers, essential for modern agricultural production. Disruptions to this strategic maritime passage and the resulting impediment to fertilizer transport are driving up prices, and food costs.

Unions Advocate Caution

While many voices are calling for tax adjustments, CCOO is urging caution. The union, led by Unai Sordo, rejects a “generalized” tax reduction and instead advocates for price controls, similar to measures implemented in countries like Croatia for petroleum derivatives. Formations like Podemos and Sumar are also considering such approaches.

The situation is evolving rapidly, and the Spanish government faces a complex challenge in balancing the need to support businesses and consumers with maintaining fiscal stability. The coming days will be crucial as the government finalizes its response to the economic fallout from the Middle East conflict. The impact of these events extends beyond Spain, as global energy markets react to the instability in the region. The International Monetary Fund (IMF) has already warned that a prolonged conflict could significantly affect prices, energy markets, and inflation worldwide, urging governments to “prepare for the unthinkable.”

The rising cost of fuel is a particularly pressing concern, with gasoline prices in Spain reaching levels not seen since late 2023. The Organization of Consumers and Users (OCU) estimates that electricity bills could increase by around 20 euros this month. These increases are placing a strain on households and businesses alike, and the government’s response will be closely watched.

The European Union is also considering measures to address the energy crisis. European Commission President Ursula von der Leyen has opened the door to a price cap on gas and other emergency measures, including reducing taxes on electricity, providing government subsidies, and promoting joint energy purchases as a bloc. Von der Leyen emphasized the need to reduce energy bills for citizens and businesses, acknowledging the pressure they are already facing.

The global competition for liquefied natural gas (LNG) is intensifying as countries seek alternative energy sources. This competition is further exacerbating the price pressures and adding to the uncertainty in the energy market. The situation highlights the importance of diversifying energy supplies and investing in renewable energy sources to reduce dependence on volatile fossil fuel markets.

For Spanish consumers, the immediate impact is being felt at the gas pump and in rising electricity bills. The government’s decisions in the coming weeks will be critical in mitigating the economic consequences of the Middle East conflict and protecting the financial well-being of citizens and businesses.

Next Steps: The meetings between the Spanish government and union/employer representatives on Thursday will be a key indicator of the direction the government will take. Further announcements regarding specific economic measures are expected in the coming days.

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