The uncertainty triggered by the US-Israeli attack on Iran has once again brought the security of European economies into focus, particularly as governments of Eurozone countries prepare to manage the fallout in two key areas: the potential for a new energy shock that could reignite inflation, and the management of monetary policy by the European Central Bank (ECB).
In simple terms, the key questions now are whether citizens will experience another wave of high prices and reduced purchasing power, and whether interest rates and loan repayments will rise again. These broader issues are expected to be discussed by finance ministers at the Eurogroup and Ecofin meetings on March 9-10, as well as by European leaders at the upcoming European Council Summit on March 19-20.
What’s next for the ECB?
On March 19, all eyes will also be on Frankfurt as the ECB’s governing council meets, closely monitoring developments. ECB Chief Economist Philip Lane, in statements to the Financial Times, noted that “inevitably, the rise in energy prices puts upward pressure on inflation, especially in the short term,” and that such a development would be “negative for growth.”
Currently, investors see an 88% probability that the ECB will keep interest rates unchanged at 2% this year, according to Reuters. Lane stated that he sees no reason for the ECB to change its stance on interest rates. “I think the point we are at now is fine,” he said, adding that unless a significant and lasting shock occurs from the Middle East, the Eurozone economy “is growing close to its potential,” with no major overheating risks foreseen.
On the other hand, Yannis Stournaras, Governor of the Bank of Greece, emphasized that the ECB should “keep all options open” regarding interest rates, as “the economic and inflationary impact of the conflict will depend largely on its duration.” He further added that, in the absence of clear visibility, the ECB should not rush to alter its monetary policy parameters but should remain vigilant and closely monitor developments.
Sharp decline in Asia’s markets
Markets have their own way of pricing risk and anticipating situations. According to reports, stock markets are now pricing in an inflationary shock, although yesterday, signs of a more measured response to the developments began to emerge.
The European STOXX 600 index recorded a slight rise of about +0.6% on Wednesday, contrasting with two previous sessions that saw significant losses in stock values. S&P 500 and Nasdaq futures (before the Wall Street session on Wednesday) showed marginal gains (+0.1% to +0.4%), but with very high volatility.
In contrast, in Asia, the Korean stock index Kospi experienced severe losses, falling by more than 12% yesterday, marking the largest daily drop ever recorded. The drop was so severe that trading suspension mechanisms were triggered to halt transactions temporarily due to excessive volatility. Major tech stocks on the Korean exchange, such as Samsung Electronics and SK Hynix, lost double-digit percentages in value.