By David Barwick – TALLINN (Econostream) – European Central Bank Vice President Luis de Guindos on Thursday said the war in the Middle East had made the euro-area outlook for growth and inflation “significantly more uncertain,” with ECB staff now expecting growth below 1% this year and inflation of 2.6%.

Speaking in Tallinn, de Guindos said the sharp rise in energy prices in recent weeks posed upside risks to inflation and downside risks to activity, with the shock expected to erode household purchasing power and weaken business and consumer confidence.

He said euro-area growth was now expected to average 0.9% in 2026 and then remain somewhat above 1% in the following years after significant downward revisions.

At the same time, de Guindos argued that the ECB was entering this period from a relatively strong position. Inflation had been around the 2% target for about a year, longer-term inflation expectations remained well anchored, there were no pronounced demand-supply imbalances, and the monetary policy stance was “broadly neutral.”

Against that backdrop, he recalled, the Governing Council last week left the three key ECB interest rates unchanged.

“We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance,” he said, adding that the ECB was “unwavering in our commitment to ensuring that inflation stabilizes at our 2% target in the medium term.”

Near-term inflation is now expected to rise above 2%, he said, with projections revised up considerably compared with December. Annual inflation is seen averaging 2.6% this year before subsequently converging to target, he said.

Much, however, will depend on the course of the conflict, he observed. According to de Guindos, the medium-term implications will hinge on how far the war spreads, how long it lasts, and how strongly the energy shock feeds through to consumer prices and the broader economy via indirect and second-round effects.

For that reason, he noted, the Governing Council had examined additional scenarios around the baseline. Those scenarios suggested that, if the energy shock proved more persistent than currently anticipated, the euro area would face higher inflation and lower growth than in the baseline.

Financial spillovers to the euro area banking sector had so far remained contained, he said, citing limited direct bank exposures to the region and strong capital and liquidity buffers. Still, he warned that the conflict could trigger “the unravelling of interconnected vulnerabilities” and broader systemic stress if market sentiment were to deteriorate sharply.

Beyond the immediate shock, de Guindos used the speech to argue for deeper European integration. He identified completion of the Single Market, a genuine savings and investments union, technological sovereignty including the digital euro, and regulatory simplification as priorities for strengthening resilience.

“The only viable path forward,” he said, is to “focus on what we can achieve together and foster deeper integration within Europe.”