ECB: Energy crisis the biggest threat to the European economy

The energy crisis linked to the conflict in the Middle East currently poses the greatest threat to the European economy, as it simultaneously drives up prices and slows economic activity, stated European Central Bank (ECB) President Christine Lagarde.

European economic system shaken

In an interview with the French newspaper La Croix, published on the ECB website, she emphasized that price stability remained a priority for the institution she leads.

– So, the main threat today is the energy crisis related to the conflict in the Middle East. It is clearly weighing on prices, but also on growth – Lagarde said.

She assessed that the European economic model had been shaken because three of its long-standing pillars - cheap energy, particularly from Russia, the vast Chinese market for European exports, and the US security framework, were facing adverse pressures, B92 reports.

According to her, energy supplies from Russia have been cut off, while China is increasingly competing with European companies in advanced technology markets.

Lagarde noted that the ECB could not restore supplies through the Strait of Hormuz or create new oil and gas reserves. Instead, it seeks to prevent the energy shock from permanently spilling over into the rest of the economy and triggering sustained inflation.

She added that such a situation could necessitate interest rate hikes, which would simultaneously increase financing costs and weigh on economic growth.

ECB adapting to circumstances

According to her, the ECB is data-driven in its monetary policy decision-making and stands ready to adjust its policy in response to changing circumstances.

Lagarde also acknowledged that the central bank had misjudged the energy shock as temporary in 2021 and admitted that, at the time, it had failed to foresee how various crises would become interconnected.

Discussing the economic outlook for the eurozone, Lagarde stated that the ECB expected growth of 0.9% in 2026.

She also highlighted that the European financial system was significantly stronger than it had been during the crises of 2008 and 2011.

Furthermore, Lagarde assessed that European countries needed to deepen the capital markets union in order to channel a greater share of European savings into investments.

European Central Bank

ECB

Christine Lagarde

economy

energy