Fuel subsidies end as oil hits $97

Germany, Spain, and Italy will all remove fuel subsidies within days of each other at the end of June. Between them, these three countries account for over 40% of eurozone GDP. Normally, that kind of fiscal withdrawal would be manageable. But it is landing while oil sits above $97 a barrel after renewed Iranian-Israeli strikes (Al Jazeera), eurozone growth has slowed to 0.1% (Eurostat, CNBC), and inflation has climbed to 3.2% (Eurostat). Prices are rising while the economy flatlines, trapping Europe in stagflation. On Wednesday, the ECB (the European Central Bank, which sets borrowing costs for the 20 eurozone countries) will almost certainly raise rates again. Markets price a 91% probability.

The real cost of oil at $97

The $97 Brent benchmark understates what European refineries actually pay. The Strait of Hormuz, the narrow waterway between Iran and Oman that carries roughly 20% of the world's oil, has been disrupted for 100 days. Ships now sail around Africa's Cape of Good Hope instead, adding 10–14 days at sea. War-risk insurance premiums have jumped over 2,000% since February. By the time crude reaches European ports, the delivered cost sits well above the headline number.

The Institut Jacques Delors calculates the EU spent an extra €46 billion on fossil fuel imports since late February. Government relief across 23 member states added another €16 billion, bringing the total economic toll to roughly €60 billion.

Gas is worse. EU storage stands at 40.8% of capacity against a mandatory 80% target by November 1 (AGSI+). The Netherlands, northern Europe's key gas hub, is at just 16.1%. Iranian strikes on Qatar's Ras Laffan complex knocked out 17% of Qatari LNG production for an estimated 3–5 years. That supply is not coming back before winter.

Three countries, one week, no coordination

Germany's fuel tax cut of about 17 cents per liter expires on June 30. Petrol currently averages €1.92 and will jump to roughly €2.09 overnight. Spain's fuel VAT reduction from 21% to 10% expires the same day; without renewal, petrol rises by about 29 cents per liter. Italy already halved its diesel subsidy on June 6, pushing diesel above €2.00.

No EU mechanism coordinates these expirations. The fiscal flexibility the Commission extended on June 3, up to 0.3% of GDP annually, covers only structural energy investments like renewables and grid upgrades. It excludes fuel tax cuts. Governments are stuck in a loop: removing subsidies pushes prices up immediately, which strengthens the case for further ECB hikes, which compounds the squeeze on households.

Who bears the weight

Wednesday's expected hike will raise the ECB deposit rate (the interest rate the central bank pays on overnight deposits, which anchors all borrowing costs) to 2.25%. But one rate serves twenty very different economies. German inflation runs at 2.7%. In Greece, it hit 5.4% in April, with energy prices up 20.2% year-on-year. Bulgaria, the EU's most energy-intensive economy, uses three times the eurozone average energy per unit of GDP. Its inflation reached 7.0%.

Real purchasing power is eroding where it hurts most. In Italy, wages grew 2.1% while prices rose 2.9%: workers earn more in nominal terms but can buy less every month. Rabobank projects Dutch petrol could reach €2.82 per liter by late summer if crude keeps climbing. The same forecast expects winter gas prices to peak at €76 per megawatt hour, roughly double current levels.

Gas storage must nearly double in under five months, with the refilling window closing in October. Bundesbank president Joachim Nagel put it plainly on June 5: "Even if the war ended today, a lot of damage has already been done to energy infrastructure and global supply chains." The subsidies expire regardless. Winter is five months away, and Europe's primary gas buffer is half-empty.