A sudden spike in oil prices, triggered by the conflict between Israel and Iran, has prompted European Union (EU) leaders to reconsider their plans to lower the price cap on Russian oil from $60 to $45 per barrel.

Leaders are concerned that the conflict in the Middle East will further inflate global oil prices, making it unfeasible to tighten sanctions in the current environment.

EU foreign ministers were expected to discuss lowering the price cap at their meeting in Brussels on Monday. However, two diplomats who spoke to Politico stated that this plan is no longer considered viable due to the escalating military tensions between Israel and Iran.

“Given the international situation and volatility in the Middle East, the idea of lowering the price cap is unlikely to gain traction,” one diplomat said. “At the G7 meeting this week, all countries agreed to postpone this decision for now. Prices were quite close to the cap, but now they are fluctuating up and down; the situation is too volatile at the moment.”

Sudden oil price increase disrupts plans

Brent crude, which had been trading below $68 per barrel since early April and had twice fallen below $60, saw its price surge into the 70-79 range after Israel launched a bombardment against Iran last Friday. Russia’s Ural oil was being sold at a discount of more than $10.

European Commission President Ursula von der Leyen noted at the G7 summit earlier in the week that the effectiveness of the current $60 price cap had diminished due to falling prices in the spring.

“However, we have seen oil prices rise in recent days, and the current price cap is serving its purpose,” von der Leyen stated. “Therefore, there is little need to lower it for now.”

Effectiveness of sanctions under debate

The primary goal of the price cap is to reduce Russia’s revenues, as approximately 40% of its budget is allocated to the war. However, achieving this requires a clear oversight mechanism for stricter restrictions, which Russia has largely learned to circumvent using its own “shadow fleet.”

According to an analysis by the Centre for Research on Energy and Clean Air (CREA), a $45 per barrel price cap in May could have reduced Russia’s oil export revenues by 27%, or €2.8 billion. However, experts at the center noted, “This calculation is based on strict and full compliance with the restrictions, which is not at the desired level even now.”

US participation is key

The idea of new sanctions has not found support from Donald Trump, who suggested that Europe should take the first step. According to Maria Shagina, a sanctions expert at the International Institute for Strategic Studies, lowering the price cap without the US would be ineffective.

“Since the price cap was designed as a buyers’ cartel, its implementation requires US participation,” Shagina explained. She argued that it would be better to focus on combating the circumvention of existing restrictions, as “more than 90% of crude oil is currently sold at a price above $60 per barrel.”

Tatyana Mitrova, a researcher at Columbia University’s Center on Global Energy Policy, acknowledged that a lower price cap would be less effective without US involvement. Still, she noted that “the EU and the United Kingdom hold a key advantage in maritime insurance, which would create serious obstacles to sanctions evasion in any case.”

Several European officials familiar with the discussions told Bloomberg that some EU countries believe a lower price cap would only work if the US also participates in the restrictions.

The German government will provide funding for an additional 11,000 military personnel by the end of the year, according to a report by the newspaper Bild on Saturday, June 21, which cited government sources. This represents an increase of approximately 4%.

The newspaper added that this funding will cover 10,000 soldiers and 1,000 civilian staff through the end of 2025. The decision is part of this year’s budget plan, which is set to be approved by the cabinet next week. The capital required for the expansion will be included in this year’s federal budget.

According to the report, the new positions will span the army, air force, navy, and cyber forces.

German Defense Minister Boris Pistorius stated earlier this month that an additional 60,000 soldiers are needed to meet NATO’s armament and personnel targets. The alliance is bolstering its forces, citing a growing threat from Russia.

The proposal will be a top agenda item at the cabinet meeting next week.

While President Donald Trump’s trade war has tied the Federal Reserve’s hands, it is pushing central banks in Europe to support their economies by lowering interest rates.

Following moves last month by the European Central Bank (ECB) and the Bank of England (BoE), the central banks of Switzerland, Sweden, and Norway cut their official interest rates this week.

All five central banks have lowered their growth forecasts in recent weeks. The common theme is that uncertainty about the future of trade, following Trump’s “Liberation Day” tariff announcement on April 2, has damaged confidence and suppressed economic activity.

In contrast, the Fed is not considering an interest rate cut this year, even though the same factors are negatively affecting the US economy. The reason is that the scope and scale of Trump’s tariffs are almost certain to raise inflation in the US.

“Everyone I know is forecasting a significant bump in inflation in the coming months because of the tariffs, because someone has to pay for them,” Fed Chair Jerome Powell told reporters on Wednesday after the US central bank left its federal funds rate target range at 4.25% to 4.50%.

At the meeting, Fed policymakers revised their inflation forecasts for 2025 and 2026 upward, signaling that interest rates will need to remain higher for slightly longer as a result.

“Our job is to keep long-term inflation expectations stable and prevent a one-time increase in the price level from turning into a persistent inflation problem,” Powell said.

In this context, Powell emphasized that the US economy is still growing at a reasonable pace, while unemployment, at just 4.2% of the labor force, is low enough for the Fed to wait a little longer before acting.

The Fed’s cautious stance has angered Trump, who has called Powell a “fool” and said this week that he “might have to force things” if a move is not made soon.

“Obviously, we have a fool at the Fed,” he told reporters in front of the White House before the Fed’s decisions on Wednesday. “There is no inflation. There is only success. I want interest rates to come down.”

On the other side of the Atlantic, the situation is very different. The initial impact of the tariffs was felt in Europe’s export sector. Companies that rushed to ship their products to the US before the tariffs took effect now face a long wait for new orders.

While central banks are still concerned that the trade war could disrupt global supply chains and introduce additional costs that would increase inflation at some stage, that concern has been set aside for now.

“The economic recovery that began last year has lost momentum,” Sweden’s Riksbank said on Wednesday, cutting its interest rate by a quarter point to 2%.

“After a strong first quarter, growth will slow again and remain quite weak for the rest of the year,” the Swiss National Bank said on Thursday morning, lowering its interest rate from 0.25% to zero.

In Norway, where the central bank had resisted cutting rates despite the post-pandemic inflation surge, it announced that the time had finally come to change its stance. Norges Bank also indicated it would cut rates again later in the year.

The BoE left its bank rate unchanged on Thursday, but it had cut rates in May, and Governor Andrew Bailey stated, “Interest rates are continuing on a gradual downward trend.”

The ECB also made its eighth interest rate cut of the past year at the beginning of June, and analysts predict that both central banks will continue to cut rates in the coming months.

As growth slows, inflation is also falling below the level desired by central banks, at least in the short term. The ECB forecasts that inflation will be 1.6% next year before returning to its 2.0% target in 2027.

In Switzerland, inflation turned negative on a year-over-year basis in May, at -0.1%.

The reason for this is largely the shaken confidence in the dollar due to Trump’s policies. The dollar has lost about 9% of its value this year against major Western currencies such as the euro, sterling, and the Swiss franc.

This has caused the prices of many of Europe’s imports, particularly commodities priced in dollars like oil and coffee, to become significantly cheaper in local currency terms.

“Because of the erratic and chaotic new policy style in the US, we have seen European currencies strengthen,” said ING economist Carsten Brzeski, describing them as “a significant driver of deflationary pressures in Europe.”

Indeed, Switzerland’s interest rate cut on Thursday was directly aimed at reducing the appeal of the franc, which global investors see as a “safe haven.”

“We will not take the decision for negative interest rates lightly,” SNB President Martin Schlegel said at a press conference, while acknowledging that he might have to lower the main interest rate below zero again.