Washington Splits G7 Over Russian Oil

The G7 has failed its biggest coordination test of the year. Finance ministers met in Paris on May 18-19 to agree a joint response to the Iran-Hormuz energy shock. They left with a communiqué that committed no one to much, and one concrete move: a unilateral US decision opposed by the rest of the alliance.

Oil is at $112 a barrel. Bond yields have reached multi-year highs across major economies. For Malta, the pressure will be felt through eurozone borrowing costs, imported energy and the price of moving goods to an island economy. The ECB meets on June 11 with no clean option.

Paris Produced Restraint, Not Relief

The communiqué called for "balanced growth and macroeconomic stability", which in practice means holding public spending steady. The consensus was fiscal restraint, not stimulus. There was no joint oil reserve release, no coordinated guidance on interest rates, and no emergency package.

The only deliverable came from Washington. The US extended its sanctions waiver on Russian oil for a second time, despite having told European allies it would not repeat the move. The purpose was clear enough: replace Iranian barrels lost because of the Hormuz closure with Russian crude.

European governments opposed the decision because it weakens the sanctions regime they have enforced since Russia invaded Ukraine. That matters for Malta too. As a small eurozone state, Malta depends on rules being predictable; when the largest ally breaks common discipline, smaller states have less room to shape the outcome.

German Finance Minister Lars Klingbeil pushed a separate agenda: a Capital Markets Union, meaning a plan to connect Europe’s fragmented investment markets so money can move more easily across borders, and a G7 food crisis action plan to secure mineral and agricultural supply chains. Both reflected Berlin’s view that this crisis goes beyond oil prices.

Neither proposal gained traction against the sanctions dispute. France also blocked discussion of a second IEA strategic oil reserve release. The March release was the International Energy Agency’s largest in its 50-year history, but it covered only a fraction of the supply lost through Hormuz.

Paris argued that remaining reserves should be saved for worse scenarios ahead. Markets did not wait for reassurance. German Bund yields, the interest rate Berlin pays to borrow, hit their highest level since 2011. Japanese 30-year bonds reached all-time highs.

The global bond sell-off was the opposite of the stability the G7 wanted to project.

The ECB's Impossible June

This leaves the ECB, the European Central Bank that sets borrowing costs for the 20 countries using the euro, trapped ahead of its June 11 meeting.

Inflation across the eurozone has been climbing, driven almost entirely by energy costs. Strip out energy and food, however, and underlying price growth is weaker. The economy has nearly stopped growing.

That mix, rising prices with stagnant output, is stagflation. Central banks have no neat answer to it. Raising rates makes mortgages and business loans more expensive, which can cool inflation when consumers are spending too freely.

It does little against a supply disruption in the Strait of Hormuz. Markets still expect a rate increase in June, but the ECB would be tightening against a problem its tools cannot reach. For Maltese households and firms, that means higher borrowing costs without any guarantee of cheaper fuel, freight or food.

Who Absorbs the Shock

Germany has revised its Q2 2026 growth forecast down to 0.3%, a sharp cut that shows how heavily the energy shock is landing on an already fragile industrial base. Chemicals, metals and glass producers have been shedding jobs and output since 2022.

A temporary fuel tax cut expires at the end of June with no replacement announced. Italy has asked the European Commission to exempt energy spending from EU fiscal rules, the caps on government borrowing that eurozone countries must respect.

Brussels said no, pointing to billions in existing EU funds that Italy has not yet spent. Defence spending already qualifies for an exemption from these rules. Energy spending does not.

No G7 member backed Italy’s push for broader flexibility. That is the real distributional choice: governments can spend more on defence without breaching the rules, but not on shielding households and firms from energy costs.

The Commission publishes new economic forecasts on May 21. If those numbers confirm the slowdown, pressure will build on Brussels to loosen fiscal constraints and on the ECB to hold rates steady.

Europe’s main economic institutions are now pulling in different directions: tighter budgets from the G7, tighter money from markets, and a supply crisis that neither lever can fix.