Schnabel: Geopolitical shifts complicate ECB policy path
ECB Executive Board member Isabel Schnabel discussed the implications of geopolitical fragmentation for monetary policy at the University of Zurich on March 27, 2026. She highlighted how global shifts impact inflation, growth, and the central bank's policy path.
Fragmentation's inflationary shadow
The latest Eurosystem staff projections from March 2026 indicate lower real GDP growth and higher HICP inflation for the euro area, primarily driven by the ongoing geopolitical fragmentation and the Iran war.
These projections present a more pessimistic outlook compared to the December 2025 forecasts, with adverse and severe scenarios showing significant deviations.
The global economy is transitioning from an era of globalization to one marked by increased fragmentation, evidenced by rising trade policy uncertainty and effective tariff rates, particularly between the euro area and the United States.
This shift is expected to exert persistent upward pressure on energy prices, worsening the euro area's terms of trade and creating knock-on effects across other commodity markets, including fertilisers and aluminium.
The ECB's expected policy rate path has consequently shifted upwards and become more uncertain, reflecting these heightened risks to price stability.
Domestic resilience meets external headwinds
Despite the challenging external environment, the euro area has demonstrated resilience, supported by robust domestic demand and strong labour markets.
Real GDP and its components show a positive contribution from domestic demand, while the unemployment rate remains stable and employment continues to grow.
However, this resilience is tested by shifting trade patterns, with Chinese competition weighing on the euro area's export performance.
The European Union is actively expanding its free trade agreements to counter these shifts and exploit the benefits of the single market.
Geopolitical shocks, such as the Iran war, have pushed up energy prices, posing particular challenges to the euro area amid low gas storage levels.
This situation exacerbates the upward revision in inflation expectations, with medium-term risks tilted to the upside, as indicated by HICP inflation fixings and the balance of risks to euro area inflation.
A new era for central banking
Schnabel's speech vividly illustrates the ECB's growing dilemma in navigating external shocks that increasingly fall outside traditional economic models.
While the euro area's domestic resilience provides some buffer, the persistent geopolitical headwinds demand a more agile and potentially unconventional policy toolkit.
This new reality suggests that inflation and growth trajectories will remain highly susceptible to non-economic factors for the foreseeable future.