Euro zone economy weathers energy shock as AI and fiscal support sustain growth

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Eurozone weathers energy shock

Highlights

Euro area growth persists despite higher oil and gas prices post-Iran war, as ECB notes declining energy reliance and stronger renewables reduce vulnerability.
AI-related trade and outperforming technology export orders now provide a significant tailwind, supporting euro area investment and economic activity.
Euro zone fiscal impulse estimated at 0.5% of GDP—double prior expectations—driven by German defence and infrastructure spending, though ECB warns much of this may be temporary.

ECB assessment highlights growth buffers

As reported by Reuters, citing the European Central Bank in a blog published on Wednesday, the euro area continues to grow despite a surge in oil and gas prices after the Iran war disrupted energy markets. Business surveys also indicate that expansion remains intact, even as the energy shock contributes to a broader global bond selloff.

ECB economists Oscar Arce, Gerrit Koester and Beatrice Pierluigi say the economy is now only about half as reliant on oil as it was in the early 1990s, reducing the impact of higher energy prices. They add that stronger renewable and nuclear power generation has weakened the link between gas prices and electricity costs in several countries.

The blog also says AI-related trade has become an important tailwind for the euro area. Technology-related export orders and AI-linked sectors are outperforming, adding support to investment and activity across the bloc.

Policy debate turns to durability of support

Fiscal policy is also providing a larger boost than previously expected. The economists estimate the fiscal impulse at 0.5% of GDP, twice the size anticipated at the end of last year, mainly because of German government spending on defence and infrastructure.

Still, the ECB economists warn that much of this support may prove temporary. Global demand, fiscal stimulus and AI investment could fade, leaving the euro zone more exposed if geopolitical tensions worsen or energy markets face fresh disruptions.

The findings feed into a wider policy debate over whether structural changes in the global economy are lifting growth, investment and interest rates after a prolonged period of weakness. They also come as the ECB debates further interest rate increases to contain an energy-led inflation surge, with a third rate hike of the year expected in December.

Mario Draghi’s warning on the policy trade-off between inflation control and long-term growth highlighted the risk that keeping interest rates above growth for too long can worsen debt dynamics and ultimately undermine productive investment. Our earlier article noted his call for central banks to prioritise price stability while avoiding unnecessary tightening, alongside EU-level measures—such as market integration and funding—to support investment, including in AI-related sectors.

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