The European Central Bank warns that a new energy shock could reignite inflation and slow down the economy of the eurozone.

The eurozone economy remains vulnerable to a new energy shock, even though the European Central Bank's baseline scenario does not assume a further major deterioration of the energy infrastructure. In a presentation held on Wednesday in Frankfurt, Philip R. Lane, a member of the ECB's Executive Committee, indicated that the bank is working with a baseline scenario, an adverse one, and a severe one, all built around the risks generated by conflict, energy pressures, financial uncertainty, and second-round effects on inflation.

In short

The ECB has analyzed a baseline scenario, an adverse one, and a severe one for the eurozone economy, starting from energy and geopolitical risks.

In the severe scenario, the impact on total inflation approaches three percentage points above baseline in 2027.

In the severe scenario, GDP growth is weaker in 2026 and 2027, before a decline followed by recovery in 2028.

The ECB states that energy can produce greater indirect effects on the prices of goods, services, and wages than those suggested by standard models.

Separate ECB data on negotiated wages, however, indicate a tempering of wage pressures to around 2.6% by the end of 2026.

Lane's presentation, titled "The outlook for the euro area economy," was delivered at the ECB and Its Watchers XXVI conference in Frankfurt on March 25, 2026. The document starts from the assumption that the baseline scenario does not include an explicit assumption regarding the duration of the conflict or the destruction of energy infrastructure, but maintains energy prices according to the technical assumptions available as of March 11, 2026, and takes into account a previously observed increase in the VIX index of 4.4 points between February 27 and the deadline used in the exercise.

In the adverse scenario, the ECB assumes acute disruptions to energy supply, but without significant additional destruction of infrastructure. At the same time, financial volatility would increase more strongly, with a 10-point rise in the VIX, before a relatively quick recovery in the third quarter of 2026. In the severe scenario, energy disruptions are even more acute, with significant additional destruction of infrastructure, and the VIX rises by 14 points and remains high until the end of 2027. In both scenarios, the ECB states that the energy shock could produce nonlinear effects, that is, stronger than those estimated by standard models, including on food, goods, services, and wages.

The most important macroeconomic conclusion is that energy remains the dominant channel for transmitting risk. The central chart of the presentation shows that, in the adverse scenario, eurozone GDP would deviate downward from the baseline in 2026 and 2027, and in the severe scenario, the loss is even more pronounced, of about half a percentage point in 2026 and about 0.4 points in 2027, before a positive recovery in 2028. At the same time, total inflation measured by HICP could visibly rise above the baseline scenario, with a moderate impact in the adverse scenario and a peak close to three percentage points in 2027 in the severe scenario. Core inflation, calculated excluding energy and food, would also move upward, especially in 2027, suggesting that the ECB does not view the risk solely through the lens of raw energy but also through its propagation into the rest of the economy.

The ECB document also emphasizes the comparison with the energy crisis of 2021-2022. On the slide dedicated to assumptions regarding raw materials, the bank shows that the severe trajectory of oil and gas prices does not mechanically repeat the peak of 2022 but pushes the synthetic energy price index into a sufficiently high zone to activate nonlinear effects in the transmission to the economy. In another chart, the ECB explicitly shows that the March 2026 projections bring the synthetic energy indicator close to the threshold of a medium-intensity energy shock, a threshold beyond which the effects on inflation tend to amplify.

Another signal monitored by the bank is consumer reaction. The ECB shows that consumer confidence in the eurozone deteriorates around geopolitical conflicts and includes historical comparisons with the Gulf War, the September 11 attacks, the Russian invasion of 2022, and the conflict in March 2026. The message is that external shocks do not only hit through energy prices but also through confidence, consumption, and the postponement of economic decisions.

On the economic activity side, Lane also included data on PMI indices for industry, services, and the composite economy, with observations up to March 2026. The charts show a still fragile picture, where new orders and business outlook do not suggest a strong acceleration of the economy, even before including a potential new energy shock. The ECB thus indicates that the economy starts from an already vulnerable position, making adverse scenarios more relevant for monetary policy.

At the same time, the central bank closely monitors signals regarding price formation. The charts presented by Lane show that firms' expectations regarding selling prices, both in the European Commission surveys and in the Corporate Telephone Survey and PMI, have clearly declined compared to the peaks of 2022. The same picture appears in the ECB's SAFE survey for enterprises, where expectations regarding selling prices are more moderate than in previous years. In other words, without a new strong external shock, price pressures seem to be normalizing. This is precisely why the ECB treats energy as the main risk of upward deviation in inflation.

The labor market remains another key variable. In the presentation, Lane shows both the trajectory of compensation per employee and the evolution of the Indeed wage tracker for new hires. The overall picture is one of a gradual moderation of wage dynamics, without any visible further acceleration in recent data. This conclusion is reinforced by a separate update published by the ECB on March 23, according to which the institution's wage tracker continues to indicate a tempering of negotiated wage pressures in 2026. The main indicator shows 3.2% in 2025 and 2.3% in 2026, while forward-looking information indicates a stabilization of negotiated wages around 2.6% by the end of 2026. The indicator with one-off payments shows 3.0% in 2025 and 2.6% in 2026, while the indicator excluding one-off payments shows a decrease from 3.9% in 2025 to 2.6% in 2026.

This combination of factors explains the ECB's cautious tone. On the one hand, the current dynamics of wages and firms' prices suggest a calming compared to the previous inflationary peak. On the other hand, energy shocks and geopolitical volatility can quickly reset this process, especially if they translate into higher costs, financial uncertainty, and second-round effects on wages and core prices. Lane's presentation suggests that the ECB does not see these risks as mere background noise but as a real source of deviation for both growth and inflation.

Another important element is that the ECB exercise does not assume additional fiscal or monetary policy reactions beyond those already included in the baseline scenario. In other words, the adverse and severe scenarios are constructed precisely to measure the gross impact of energy, uncertainty, and global spillovers, without automatically compensating through new policy decisions. This makes the message even clearer for the markets; the eurozone economy can absorb shocks but remains very sensitive to a new prolonged energy episode.

Philip R. Lane's presentation comes at a time when the ECB is trying to assess whether the disinflation process in the eurozone is robust enough to withstand new external shocks. The material shows that, in the central scenario, the bank sees a gradual normalization of wages and prices, but keeps in the foreground the risk of an energy conflict that could reignite both total inflation and its core components.

For Brussels and European capitals, the implication is broader than monetary policy. The ECB's message is that the eurozone economy remains dependent on energy and geopolitical developments to a sufficiently large extent that a new shock could weaken growth just when the economic outlook remains fragile. In terms of public policy, this means that price stability does not depend solely on interest rates but also on energy resilience and Europe's ability to absorb external shocks without repeating the spiral of 2022. https://2eu.brussels/ro/stiri/banca-centrala-europeana-avertizeaza-ca-un-nou-soc-energetic-ar-putea-reaprinde-inflatia-si-frana-economia-zonei-euro