Eurozone Recession Fears Are Justified, Says ECB Policymaker

Greece's central bank governor, Yannis Stournaras, stated that concerns about the eurozone potentially slipping into a recession are genuine and well-founded if the Middle East conflict persists. He emphasized that negotiations to end hostilities involving Iran will be a crucial factor for the European Central Bank in shaping its monetary policy.

Stournaras, who also sits on the ECB's Governing Council, noted in an interview published on Sunday that although the eurozone economy has shown resilience, its growth momentum has weakened.

Stournaras pointed out, "Fears of a possible eurozone recession are real and justified due to a new round of negative supply-side shocks triggered by the Middle East conflict. The eurozone is highly dependent on energy imports, and rising energy prices coupled with increased uncertainty directly impact economic growth and inflation levels."

He added, "Unlike in 2022, this round of inflation is occurring against a backdrop of already weak economic growth, tighter financial conditions, and limited fiscal policy space. This narrows the room for policy adjustments and makes the economy more vulnerable to risks."

So far, rising energy prices have not yet caused significant spillover effects on inflation. However, if energy infrastructure is damaged, it could generate inflationary pressures in the medium term. Meanwhile, heightened uncertainty may also dampen investment and hinder economic growth.

He stated, "Our policy response will depend on the intensity, duration, and transmission channels of external shocks. If the shock is temporary and does not trigger significant second-round inflation effects, there will be no need to adjust monetary policy."

If inflation rises significantly and temporarily exceeds the ECB's target range, the central bank may need to fine-tune its policy moderately to curb second-round inflation effects.

According to the report, he emphasized, "If inflation deviates substantially and persistently from the policy target, we must implement strong countermeasures."