By Laura Contemori – ROME (Econostream) – European Central Bank Vice President Luis de Guindos said Wednesday that the Middle East energy shock posed upside risks to inflation and downside risks to growth, warning that it could raise market volatility and make debt servicing more difficult.
“The current energy supply shock poses upside risks to inflation and downside risks to economic growth,” de Guindos said in a press release on the ECB’s May 2026 Financial Stability Review. “It could also increase market volatility and challenge debt servicing capacities as financing costs rise in an environment of weaker economic growth.”
The ECB said in the release that financial stability risks in the Eurozone remained elevated as the Middle East war disrupted energy supply and added to uncertainty around inflation, growth and market sentiment.
The global financial system and real economy had entered the year with notable resilience, but this was now being tested by a major geoeconomic shock, the ECB said.
Geoeconomic stress was being amplified by uncertainty over global trade and international cooperation, while cybersecurity risks and hybrid threats to critical infrastructure were also rising, it said.
Financial markets had initially adjusted to the shock only briefly, leaving equity valuations still high by historical standards, the ECB said.
Corporate bond risk premia also remained compressed globally, making market pricing vulnerable to unusually high geopolitical and policy uncertainty, it said.
The central bank warned of a material risk that market sentiment could deteriorate, as geopolitical, fiscal and macro-financial downside risks appeared to be underpriced.
Fiscal expansion in a difficult geoeconomic environment could put additional pressure on public finances in highly indebted Eurozone countries and trigger a repricing of sovereign risk, the ECB said.
Non-banks had so far remained broadly resilient to the Middle East war, but low liquidity buffers, high portfolio valuations and concentrated exposures raised the risk of forced asset sales in a broad market downturn, it said.
Private markets did not represent a systemic concern in themselves for the Eurozone, but their opacity and interconnectedness warranted close monitoring, especially given possible spillovers from the United States, the ECB said.
Eurozone banks had weathered recent uncertainty well, supported by strong profitability and ample capital and liquidity buffers, the ECB said.
However, banks’ reliance on non-bank funding could expose them to liquidity and funding risks if market conditions became more volatile, it said.
Asset quality could also worsen if the Middle East war led to a marked deterioration in macro-financial conditions, even though banks’ direct exposures to the region were limited and concentrated among a few institutions, the ECB said.
A prolonged shock could generate material second-round effects, especially for firms exposed simultaneously to trade, energy and interest-rate sensitivity, it said.
This could also affect households through weaker labor markets or cost-of-living pressure, the ECB said.
The ECB said preserving financial-system resilience was essential in the current environment.
Macroprudential authorities should maintain existing capital buffer requirements and borrower-based measures to preserve bank resilience and sound lending standards, it said.
Persistent liquidity and leverage vulnerabilities in non-bank financial intermediation also required a comprehensive policy response, the ECB said.
Faster progress on the European Union’s savings and investments union would be essential to support growth and competitiveness while safeguarding financial stability, it said.