Opinion article by the Bank of Greece Governor Yannis Stournaras to Kathimerini titled “Eurozone Economic and Policy Developments”
30/07/2026 - Articles & Interviews
1. Global challenges
- We are living through a period in which the assumptions that underpinned the global economy for the past three decades are being called into question. Geopolitics, technology and demographics are no longer background conditions—they have become key macroeconomic drivers. This unusually uncertain landscape is shaped by six powerful forces.
- First, the macroeconomic consequences of the conflict in the Middle East. The disruption to energy markets and shipping routes through the Strait of Hormuz has had material consequences on energy prices, and through them, for inflation dynamics across the euro area, but also for the economic sentiment and activity. I will return to these stagflationary effects shortly.
- Second, geoeconomic fragmentation. The architecture of global trade is being reshaped by the weaponization of trade policy, by friend-shoring strategies, and by an expanding web of sanctions regimes. These developments are reconfiguring supply chains, often at the expense of efficiency, with important implications for price volatility, productivity and the resilience of the global economy more broadly.
- Third, the pace of technological change is accelerating rapidly, with artificial intelligence at the forefront of a transformation of unprecedented scale. For central banks it cuts both ways: it promises real gains in productivity and in the efficiency of financial services, but it also reshapes labour markets – displacing some tasks while raising the premium on new skills – and raises new concerns about financial stability, market concentration, income distribution, the resilience of critical infrastructure, and the speed at which shocks can propagate through an interconnected system.
-Fourth, and related to my previous point, we Europeans are presently facing an investment gap, with investment in AI technologies in the U.S. far outstripping that in Europe. Should this gap persist, and to the extent that the effects of AI are predominantly reflected in productivity gains, there would be – everything else equal of course – weakening pressures on the euro and raising new challenges for European policymakers.
- Fifth, questions surrounding the future role of the US dollar as the world's dominant reserve currency, with two forces bearing on it: the longer-standing pressure of the US fiscal trajectory, and the more immediate concern stemming from US policy shifts — including tariffs and uncertainty over policy predictability and Federal Reserve independence. Together, these developments have led many to ask whether the dollar’s status can be taken for granted. The present juncture provides a unique opportunity for the euro to increase its role as an international currency – but time is growing short.
- Sixth, persistently high public debt levels across major economies are constraining fiscal space precisely at a moment when many governments face mounting demands for higher spending on defence, infrastructure, and the green and digital transitions. This also has implications for the interaction between fiscal and monetary policy.
- These forces do not operate in isolation. They reinforce one another, creating a more volatile and less predictable global economy, and define an operating environment that demands both agility and determination from policymakers.
- Against this backdrop, let me focus on euro area developments, challenges and prospects.
2. Euro Area Economic Developments
- The conflict in the Middle East has exerted stagflationary pressures on the euro area economy.
- Following a period of inflation close to our target, the conflict triggered a renewed increase in energy prices and, consequently, in headline inflation. Inflation rose to 3.2 per cent in May, the highest reading since September 2023, but unexpectedly eased to 2.8 per cent in June. Energy inflation declined to 8.5 per cent from 10.8 per cent, while core inflation, excluding energy and food, moderated to 2.4 per cent from 2.6 per cent. Services inflation also eased, to 3.2 per cent from 3.5 per cent. It was an encouraging development, consistent with a retreat in oil prices following a ceasefire in June between the US and Iran. However, subsequent clashes between the US and Iran highlighted the fragility of both the ceasefire and the retreat of energy prices.
- At the ECB Governing Council, we are monitoring closely the risk of second-round effects, that is the extent to which the earlier energy-driven shock feeds through into wage- and price-setting more broadly.
- Encouragingly, medium-term inflation expectations across market- and survey-based measures remain broadly anchored around our two per cent target, which reflects, to a large extent, the credibility our monetary policy framework has built over time.
- Economic growth, meanwhile, has remained subdued with the Middle East conflict weighing on confidence and activity. The euro area economy stalled unexpectedly in the first quarter, at 0 per cent, driven by a sharp drop in measured activity in Ireland. Stripping Ireland out, the euro area would have posted modest positive quarterly growth at 0.3 per cent, supported by domestic demand. Both public and private consumption contributed positively, although investment and inventories declined.
- Labour markets, however, remain resilient, with unemployment near historical lows, underscoring the underlying strength of the euro area economy.
- Looking ahead, we now expect domestic demand to be somewhat softer than we projected in March, as uncertainty about the Middle East weighs on confidence, and higher prices erode real incomes. Nevertheless, household balance sheets remain solid overall, and consumption should stay the main engine of growth.
- In the near term, the elevated volatility in energy costs and weaker confidence will affect private investment. This weakness should be partly offset by firms investing in new digital technologies, while higher government spending on defence and infrastructure should also provide further support.
- Financial conditions have remained orderly despite elevated geopolitical uncertainty. Risk premia have increased only moderately, while bank funding conditions, albeit tighter to some extent, continue to support the transmission of monetary policy. Preserving the smooth transmission of monetary policy, of course, is an important consideration.
3. Euro area Monetary Policy
- Turning to our monetary policy stance, at our July ECB meeting we left interest rates constant after our decision in the June meeting to raise the three key ECB interest rates by 25 basis points, bringing the deposit facility rate to 2.25 per cent -- the first increase since September 2023, when the previous tightening cycle ended. The June rate hike followed updated staff projections showing headline inflation of 3.0 per cent in 2026 and 2.3 per cent in 2027 — revised up from March, largely on account of higher energy and food price expectations — before returning to 2.0 per cent in 2028, alongside growth of 0.8 per cent in 2026, 1.2 per cent in 2027 and 1.5 per cent in 2028. The ECB Governing Council in the June meeting judged that decision to be robust across a range of scenarios on how the conflict might evolve, and necessary to keep medium-term inflation expectations anchored at target and to fulfil its price stability objective.
- At the July meeting, as said previously, we left interest rates constant. Following the ceasefire between the US and Iran in June, oil prices retreated to near their pre-war levels. In the past period, however, oil prices have again risen as the ceasefire has been broken, although they remain far below their recent peaks. Evidently, markets expect another ceasefire in light of the US mid-term elections in the fall.
- In these circumstances, we remain appropriately watchful: a de-escalation would be, of course, most welcome, but is not assured. Should it take place, it will take time for lower energy prices to work their way through the pricing chain, and for us to be confident that second-round effects have not taken hold in the interim. The asymmetry matters here: energy prices pass through to headline inflation quickly on the way up, but more slowly on the way down.
- Amid this uncertain environment, our meeting-by-meeting approach has proven its worth. Our aim is to keep inflation expectations anchored near our 2 per cent objective over the medium term, in line with our commitment to price stability.
- Our decisions remain data-dependent, and we will retain full optionality in either direction, calibrated to the evolving balance of risks. What matters is not individual data releases but whether incoming information changes our assessment of the medium-term inflation outlook. In particular, we will continue to monitor the persistence of services inflation, wage developments and the transmission of past policy decisions.
4. Structural Challenges and Opportunities
- The current international upheavals are not only a source of risk, but also a wake-up call for Europe. They underscore the urgency of accelerating European integration and strengthening the coordination of common policies. In an increasingly fragmented and uncertain world, Europe's prosperity and resilience will need to rely less on external conditions and more on its own capacity to innovate, invest and adapt.
- As I mentioned at the outset, we need to close the AI investment gap with the U.S., while boosting the overall performance of our economy – two inter-related challenges.
- Boosting productivity, enhancing competitiveness, and strengthening strategic autonomy and resilience of the euro area require a coherent European strategy that will effectively address the fragmentation of goods, services and capital markets, foster innovation, channel investment in the most productive sectors, promote financial and fiscal deepening, and enhance the international role of the euro.
The structural challenge
- The diagnosis has already been set out in the Draghi report, which has shown that Europe's productivity growth has lagged behind that of its main peers for almost two decades, while demographic trends are expected to reduce the supply of labour in the coming years. A shrinking workforce can no longer sustain growth, so productivity must play a greater role in driving it.
- The deeper problem is structural. For much of the past fifteen years, the euro area leaned on external demand, running persistent current account surpluses while domestic demand as a share of GDP fell towards the bottom of the range among advanced economies. This growth model served Europe well for a time, but it has become increasingly vulnerable in a world characterised by geopolitical fragmentation and rising trade barriers.
- At the same time, Europe has been exporting significant share of its savings: US capital markets now absorb roughly one-third of euro area residents’ listed equity holdings — a share comparable to what is invested domestically.
- While those holdings generate financial returns for European savers, the productivity and innovation gains accrue primarily where the capital is deployed — overwhelmingly in the United States.
- Europe, therefore, urgently needs to channel these savings into productive investment in common European priorities: financing the green and digital transitions, strengthening energy security, supporting defence capabilities and modernizing infrastructure.
- But, the investment sword cuts two ways. To channel domestic savings into domestic markets, we need to raise productivity, to eliminate the various direct and indirect barriers which, unfortunately, still exist in the cross-border transactions of goods, services as well as in the movement of capital for bank mergers, and to issue common, safe debt along the lines of the Recovery and Resilience Facility to finance public goods such as defense, green and digital transition and energy security, as analysed and mentioned emphatically in the Draghi and Letta reports.
The European policy response
- Meeting these challenges calls for action on several fronts, each reinforcing the others. Let me set out the response as a series of connected pillars.
- First, raising potential growth — through structural reform, innovation, elimination of intra-european implicit constrains on trade of goods, services and capital as well as the simplification and harmonisation of Single Market rules, as shown in the Letta Report, so that firms can adapt faster and scale investment. Reforms that lift labour participation, skills and productivity, that support innovation, and that accelerate the AI adoption and energy transition are all part of the same effort.
- Capital markets are the second and the most pivotal pillar. Completing the Savings and Investments Union, would allow better capital allocation and provide the scale-up financing that too often drives Europe's most promising firms to relocate across the Atlantic. Jointly issued financing instruments — critically including a common European safe asset — would strengthen the Union's capacity to absorb symmetric shocks, reduce fragmentation and finance shared priorities.
- A third pillar is the completion of the Banking Union. Making concrete steps towards a European Deposit Insurance Scheme on a clear timetable would serve as the natural next step to underpin cross-border banking and the free movement of capital and liquidity across Europe, with clear benefits for financial stability and for banks’ competitiveness.
- While each of these measures will help boost the international role of the euro, a digital euro can also play an important role. The digital euro addresses the retail side — a digital form of cash for everyday payments, complementing rather than replacing banknotes and private solutions. On the wholesale side, Pontes and Appia aim to deliver a future‑ready, innovative and integrated European financial DLT-based ecosystem.
- Finally, sound public finances are a decisive condition under which governments can credibly raise expenditure where it matters most — defence, infrastructure, innovation — without compromising debt sustainability.
Conclusion
- Europe faces an exceptionally challenging and uncertain external environment. Yet periods of disruption also create opportunities.
- Monetary policy will continue to do what it must to preserve price stability, while Europe's long-term prosperity will depend increasingly on our ability to raise productivity, deepen our Single Market, complete the Banking Union and the Savings and Investments Union, mobilize private capital and strengthen our economic resilience.
- The Draghi and Letta Reports give us a roadmap to a more prosperous and secure future. After more than 2 years since their appearance, it is about time we accelerate effort into the future.