As noted in previous articles, the EU is facing a critical period in its history in many respects. It is currently facing a situation where it is not directly involved in the conflict in the Middle East, yet the economic effects affecting the continent are absolutely significant. The war against Iran unleashed by the United States and Israel goes beyond geopolitical consequences: it risks directly impacting—and in many cases, this is already happening—citizens’ wallets as well. Much will depend on the scenario that unfolds in the coming days. The first is for a short-lived crisis, with a subsequent normalization of prices, especially for oil and gas, by the summer. In this case, growth would not be significantly affected, and thus, essentially, inflation would not experience significant spikes either. The second, which instead envisions a longer period of raids, bombings, and fighting, would lead to more frequent interruptions in energy supplies, with cascading increases in prices, from fuel to food. Goldman Sachs claims that this latter scenario would lead to crude oil stabilizing around $100, if not higher, a barrel (Brent is currently trading at $104, while WTI is around $95), impacting global growth by about 0.5%.

Repercussions are also likely for manufacturing and industrial activities: these would pass on higher energy costs to final goods prices. The problem, The Wall Street Journal wrote a few days ago, is that the options available to European political leaders to combat the crisis “are more limited than those available during the outbreak of the war in Ukraine” in 2022. “Financing costs were lower then, and EU households and businesses had funds available from economic stimulus programs for the pandemic.” Therefore, according to the near-unanimity of analysts, the timing factor will be crucial, with the hope that the shock will not drag on for too long. At the latest meeting of the European Central Bank, a possible interest rate hike was discussed. For now, Frankfurt intends to wait and see how the conflict will continue, thus deciding to leave interest rates unchanged. However, it is not underestimating the sudden change in the scenario brought about by the war in the Middle East. The president of the Eurozone central bank, Christine Lagarde, on the one hand, expressed confidence: “The Governing Council is well positioned to address this uncertainty.” On the other, she emphasized the need to wait for developments to calibrate appropriate monetary policy moves. The intensity and duration of the conflict, and the transmission of energy prices to consumer prices and the economy, are the variables to monitor.

The conflict “will have a substantial impact on short-term inflation through higher energy prices,” Lagarde summarizes. Frankfurt, however, is waiting, and in the meantime, analysts are working on the various scenarios the war in the Middle East could trigger. “These scenarios will be published alongside the staff projections on the ECB website.”

For now, the estimates are based on data available up to March 11, thus already incorporating the first effects of the war that broke out at the end of February. Compared to the December projections, inflation projections have risen, reaching 2.6% (from 1.9%) in 2026, 2.0% (from 1.8%) in 2027, and 2.1% (from 2%) in 2028. The gap widens this year and then narrows over time.

Excluding energy and food, the index stands at 2.3% in 2026, 2.2% in 2027, and 2.1% in 2028. “This figure is also higher than expected in the December projections,” Lagarde emphasizes, attributing this to the fact that rising energy prices also impact inflation excluding energy and food. The end-of-year forecasts indicated 2.2% in 2026, 1.9% in 2027, and 2% in 2028, respectively.

Growth has been revised downwards: 0.9% in 2026, from the previous estimate of 1.2%, 1.3% in 2027, and 1.4% in 2028, driven in particular by the effects of the war on commodity markets, real incomes, and confidence. Low unemployment, solid private sector balance sheets, and public spending on defense and infrastructure should, however, continue to support growth.

The ECB’s rate decisions, Lagarde clarified, continue to be guided by the same criterion it has always followed: keeping inflation consistently below 2%. Since the projection for this has already changed, the likelihood of interventions in the coming months is increased. Markets are already pricing in the scenario of a rate hike, albeit still with the uncertainties inherent in a period characterized by a situation of development.

Meanwhile, rates remain at 2% on deposits and 2.15% on major refinancing operations, while they remain at 2.4% for marginal lending.

Further to foreign policy fragmentation, internal and structural organizational challenges, a difficulty competing on the global market, and a widening growth gap with China and the United States, comes a potential economic downturn that will undoubtedly create further problems and obstacles for the European Union’s recovery plans.

By Domenico Greco