Two years ago, the European Central Bank was cutting rates. Inflation was easing, growth was slow but steady, and the eurozone story finally looked boring.
That story is over.
The European Commission now sees eurozone GDP growing just 0.9% in 2026, down from 1.3% last year and well below its November forecast of 1.2%.
Inflation got the bigger revision. The Commission raised its 2026 inflation forecast to 3.0%, up from 1.9%, and pushed the 2027 forecast to 2.3% from 2.0%.
Both numbers are well above the ECB's 2% target. That math leads in one direction, and Frankfurt knows it.
The picture isn't uniform across the bloc. Germany and Spain are holding inflation at last year's levels, while France and Italy are seeing notably faster price growth driven by energy.
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The trigger is energy. Brent crude is above $100 a barrel, and the Strait of Hormuz - the shipping lane that carries about a fifth of the world's oil - is effectively closed despite a fragile US-Iran ceasefire.
Eurozone business activity contracted at the fastest pace in two and a half years in the latest PMI data, and consumer confidence dropped to a 40-month low after the US and Israel launched strikes on Iran.
This is Europe's second energy shock in five years, after the one driven by Russia's invasion of Ukraine in 2022. The first one is what forced the bloc to diversify its supply, which is why the EU thinks it's better positioned this time around.
Markets now expect the ECB to raise rates at its June 11 meeting, with one or two more hikes possible over the following year.
It's a tough call. Hiking into a slowdown risks deepening the slowdown, while not hiking risks letting inflation expectations get unmoored.
European Economy Commissioner Valdis Dombrovskis spelled out the downside scenario. If the Iran war drags on and Brent hits $180 a barrel by late 2026, growth forecasts for this year and next would roughly halve.
The debt picture gets worse too. Italy is set to overtake Greece as the eurozone's most indebted country by 2027, with gross government debt at 139.2% of GDP, and eurozone budget deficits are expected to climb from 2.9% in 2025 to 3.5% in 2027.
Inflation prints from France, Germany, Italy, and Spain are coming next week, and those will tell you how much room the ECB actually has to maneuver on June 11.
If even one of those four prints surprises to the upside, the case for a faster hiking cycle gets stronger overnight.
Energy decides Europe's next move. It always does.
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