Euro area economy faces risks from energy and uncertainty
Philip R. Lane, Member of the ECB Executive Board, presented an outlook for the euro area economy on March 25, 2026. He detailed baseline, adverse, and severe scenarios, highlighting risks from energy supply disruptions and elevated uncertainty.
Energy and uncertainty shape economic outlook
Philip R. Lane presented three scenarios for the euro area economy: baseline, adverse, and severe.
The baseline assumes no explicit conflict duration or energy infrastructure damage, with energy prices following March 11, 2026, technical assumptions and a 4.4-point VIX index increase.
The adverse scenario projects acute energy supply disruptions without major infrastructure destruction, a 10-point VIX increase reversing quickly, and stronger non-linear impacts on food, goods, services, and wages, drawing parallels to the 2021-22 energy shock.
The severe scenario envisions even more acute energy disruptions and significant infrastructure destruction, leading to a 14-point VIX increase sustained until end-2027.
This most extreme outlook anticipates sizeable indirect and second-round inflation effects due to pronounced non-linearities.
Monetary and fiscal policy reactions are assumed to remain consistent with baseline assumptions.
Divergent paths for euro area growth
ECB-BASE model simulations reveal significant impacts on euro area growth and inflation under adverse and severe scenarios.
The adverse scenario projects a notable reduction in real GDP growth, particularly in 2026-2027, accompanied by elevated HICP and core inflation.
The severe scenario forecasts a more pronounced downturn in real GDP growth, with impacts extending through 2028.
This extreme outlook also projects significantly higher HICP and core inflation compared to the adverse scenario, driven by stronger non-linear effects.
Overall impacts integrate energy, uncertainty, and trade effects, with uncertainty shocks on GDP estimated via an empirical BVAR model.
These projections underscore potential substantial economic headwinds from intensifying geopolitical tensions.