Philip R. Lane, ECB Executive Board member, outlined the economic and fiscal implications for Europe of the Middle East conflict, including growth, inflation, and monetary policy responses, in a speech to the European Parliament.
Philip R. Lane, Member of the Executive Board of the European Central Bank (ECB), delivered remarks at an exchange of views on “The economic and fiscal implications in Europe of the Middle East crisis” at the European Parliament’s Committee on Economic and Monetary Affairs.
He highlighted that the situation remains fragile, with risks of escalation, and discussed the impact on euro area economic activity and inflation.
In the first quarter, the euro area economy contracted by 0.2%, mainly due to Ireland. Excluding Ireland, the economy grew by 0.3%, supported by domestic demand and exports. The war has weighed on activity, especially in services, with new orders stagnating in May.
The labour market remains resilient, with an unemployment rate of 6.3% in April. Firms are holding on to workers despite weaker conditions, though demand is cooling.
Domestic demand is now expected to be weaker due to higher energy costs and lower confidence, but household balance sheets remain solid. Public investment is supported by increased government spending on defense and infrastructure.
Projections estimate real GDP growth of 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028.
Inflation increased to 3.2% in May, driven by energy prices and core inflation rising to 2.6%. Energy inflation remains high at 10.8%, influencing overall inflation expectations.
Inflation is expected to stay above target into the first half of 2027, with projections of 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. Risks are skewed to the downside for growth and upside for inflation.
The ECB responded with a 25 basis point rate increase in June, citing signs of energy price pass-through and persistent inflation risks. The Governing Council will continue to monitor economic data and adjust policy accordingly, maintaining a flexible, data-dependent approach.
In conclusion, the Middle East crisis has increased uncertainty, affecting inflation and growth. The ECB remains committed to stabilizing inflation at 2% and will adapt policies based on incoming data and risks.
More information is available at the official ECB press release: https://www.ecb.europa.eu//press/key/date/2026/html/ecb.sp260623~c112a749e2.en.html.
