Bank of Greece Governor Yannis Stournaras, a member of the European Central Bank’s (ECB) Governing Council, has warned that concerns about the euro zone slipping into recession due to the ongoing Middle East conflict are “real and justified.” Speaking in an interview published in Cyprus’s Phileleftheros newspaper on Sunday, Mr. Stournaras emphasised that talks to end the Iran war will be a pivotal factor for the ECB’s monetary policy decisions. The European Central Bank is the central bank for the euro zone, responsible for setting monetary policy for the 20 European Union member countries that use the euro, with a primary objective of maintaining price stability.
While acknowledging the euro zone economy’s resilience, Mr. Stournaras noted that its momentum has weakened. He highlighted that the conflict represents a “new negative supply-side disruption,” contributing to these recessionary fears. “Rising energy prices and increasing uncertainty directly affect growth and inflation, given the euro zone’s high energy dependence,” he stated. Stournaras further added that, unlike in 2022, the current rise in inflation is occurring within an environment of already weaker growth, tighter financial conditions, and reduced fiscal space, which constrains policy options and heightens economic vulnerability.
Despite these concerns, there has not been a significant spillover effect from higher energy prices on inflation thus far. However, Mr. Stournaras cautioned that potential damage to energy infrastructure could introduce inflationary pressures over the medium term, and increased uncertainty could hinder investment and growth. He clarified that the ECB’s response would be contingent on the intensity, duration, and transmission channels of the shock. A transitory shock without significant second-round effects would not necessitate monetary policy adjustments. Conversely, a large but temporary overshoot of the ECB’s inflation target might require a “measured adjustment” to limit secondary inflationary impacts, while a large and persistent deviation would demand a “robust” policy response.
