By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Yannis Stournaras on Sunday said the ECB’s policy response to the Middle East shock would depend on the intensity, duration and transmission channels of the disruption, and that a robust response would be needed if inflation deviated significantly and persistently from target.
Stournaras, who heads the Bank of Greece, told Cypriot newspaper Phileleftheros in an interview that the Middle East war represented a serious supply-side shock causing stagflationary pressures.
“This is a challenge for the ECB, as it must balance stabilizing inflation at target and avoiding excessive tightening that would weigh on growth,” he said.
The ECB’s analysis was focused on the risk of second-round effects, meaning the entrenchment of pressures in wages, prices and inflation expectations, he said.
“Our response will depend on the intensity, duration and transmission channels of the shock,” he said. “If it proves transitory and without significant second-round effects, no monetary policy adjustment will be required.”
If the shock caused a large but not very persistent overshoot of the ECB’s inflation target, a “measured” adjustment would reduce the intensity of second-round effects, Stournaras said.
“If it leads to a significant and persistent deviation of inflation from the target, then the response must be robust,” he said.
Based on available data, there were currently no signs of a significant pass-through of higher energy prices into inflation, though it was still too early for precise assessments, he said.
Damage to energy infrastructure in the Persian Gulf could prolong inflationary pressures over the medium term, while uncertainty threatened investment, with negative consequences for growth and long-term potential output, he said.
The evolution of peace talks was therefore a decisive factor for Governing Council decisions, Stournaras said.
Recession concerns in the Eurozone were “real and justified” given the new negative supply shock caused by the Middle East conflict, he said.
The rise in energy prices and intensifying uncertainty directly affected both growth and inflation because of the Eurozone’s high energy dependence, he said.
Unlike in 2022, inflation was rising in an environment of already weaker growth, tighter financial conditions and reduced fiscal space, limiting policy room and making economies more vulnerable, Stournaras said.
The Eurozone economy had shown resilience, but momentum remained subdued, with growth slowing from about 1.4% in 2025 to 0.9% in 2026 according to the ECB’s March projections, he noted.
The ECB’s alternative scenarios underscored the predominance of downside risks to growth, he said.
However, the Eurozone was not currently in the adverse scenario, as relative geopolitical de-escalation had contained the most extreme developments, Stournaras said.
If negotiations failed and hostilities resumed, the risk of recession would remain possible without becoming the baseline, he said.
On fiscal policy, Stournaras said targeted and temporary support measures were justified by the disproportionate burden of higher energy costs on lower-income households and energy-intensive firms.
However, fiscal starting points were worse than during the previous crisis for many major Eurozone economies, implying limited fiscal space, he said.
The war in the Middle East, along with the prolonged war in Ukraine, represented the most important risk to financial stability in Greece and the rest of Europe, Stournaras said.
Depending on the scenario, there could be an increase in new non-performing loans, especially from vulnerable households or firms in sectors sensitive to energy-price changes, he said.
In an adverse scenario, higher funding costs due to market volatility and revisions to banks’ business plans because of weaker demand for new loans could not be ruled out, he said.
Greek, Cypriot and other European banks entered the period of heightened uncertainty with strong fundamentals, he said.
