The European economy failed to sustain its modest momentum in the fourth quarter of 2025, with growth slowing to 0.2 percent compared with the previous quarter. Despite declining inflation and lower interest rates, there is little reason to expect the picture to improve any time soon.
In fact, the European Union risks stagflation if the Middle East conflict persists and the bloc continues to phase out Russian energy imports. The war in the Middle East has already disrupted oil and gas supplies, driving up the price of Brent crude by approximately 40 percent and pushing European gas to its highest level since January 2023. If the energy squeeze continues, Europe may be forced to raise interest rates and rein in spending to combat inflation, worsening the economic slowdown.
