The Ukrainian front lines keep European markets twitchy all day, and whatever outcome next year brings (or does not bring) to the war, it will impact the bloc’s economy heavily. The good news is, it is up to the Europeans to decide their future. The bad news is, it really is up to them.
Welcome to Europe, 2026. The Union has taken nearly four years to adapt to Russia’s invasion of Ukraine — but it did, of sorts. Gas is pricey but not ruinously so, and German coffers are opening. Economists mostly avoid doomsday scenarios, arguing instead over whether the continent is poised for a comeback or another limp year.
Wholesale Dutch TTF gas, which once spiked to €314-per-megawatt-hour, now hovers around a manageable €30, still twice the pre-war average but far from crisis level. Liquefied-natural-gas imports, brisk renewable roll-outs and bulging storage tanks have insulated households and factories. The International Energy Agency reckons Russian pipeline gas supplies have shrunk to less than a tenth of Europe’s import mix. Yet energy remains the conduit through which the conflict shapes every macro forecast.
Higher energy costs, though ebbing, continue to bite. The European Central Bank estimates that the shock trimmed corporate investment to the tune of 800,000 industrial jobs vanishing since the invasion in 2022. Germany will respond on 1st January with a €50-per-megawatt-hour “industrial power price”, a three-year subsidy worth up to €5bn. Falling wholesale prices may limit the final bill. That is good news for treasuries, but poor comfort for voters who see generous cheques for smokestack firms.
You might be interested
Stimulus or stasis?
The conflict has also rewired commerce. EU-Russia goods trade has shrivelled by more than 80 per cent. Europe now runs a surplus with its eastern neighbour, a novelty driven by embargoes on energy and dual-use kit. Some of the missing flow pops up in Armenia, Georgia and Kazakhstan, where EU exports have doubled or tripled. Even so, overall EU trade momentum has slowed as American demand fades and Chinese competition stiffens.
The Financial Times sounded out 88 economists on Europe’s prospects. Many pin their hopes on Berlin’s €1tn debt-fuelled splurge on infrastructure and defence. Nick Kounis, chief economist at ABN Amro, says the continent needs a revival of “animal spirits” to kindle demand.
Anyone expecting a significant bounce in Germany’s economic fortunes in 2026 is likely to be disappointed. — Felix Feather, economist at abrdn
The poll’s median forecast puts euro-zone growth at 1.2 per cent in 2026—close to the ECB’s own number—with a pick-up to 1.4 per cent the year after. Optimists such as Jan von Gerich of Nordea think “private consumption has a lot of potential to surprise to the upside”. Reijo Heiskanen of OP Pohjola even predicts a “comeback of the North”.
Tug of war
Not everyone buys the story. Léa Dauphas of TAC Economics wonders “whether the fiscal impulse can translate into durable domestic momentum rather than merely cushioning external shocks”. James Rossiter of TD Securities expects a “tug of war” between geopolitical jitters and lavish budgets.
Henry Cook of MUFG doubts that extra spending will radiate beyond Germany: “Increased government spending will mechanically lift German growth, but the key question is whether or not it translates into a broader recovery.” Fiona scholars worry, too, that the cash could leak into welfare rather than bricks, mortar and fibre-optic cables.
Private consumption has a lot of potential to surprise to the upside. — Jan von Gerich, economist at Nordea
Pessimists find fresh ammunition in the industrial malaise. American tariffs of 15 per cent on a swathe of European goods, imposed by US President Donald Trump, already unsettle boardrooms. “So far they have not had a meaningful negative impact on euro-zone growth,” says Fabio Balboni of HSBC, but many respondents fear the worst is yet to come.
Gas still rules
Apolline Menut at Carmignac warns that Chinese exporters threaten to “further hollow out” EU industry and laments a “too-little-too-late approach” by policymakers. Felix Feather of abrdn, a UK investment company, puts it more bluntly: “Anyone expecting a significant bounce in Germany’s economic fortunes in 2026 is likely to be disappointed.”
Energy markets offer a mixed picture. Forward curves suggest TTF gas will average €29-30 per megawatt hour in 2026. That is cheap enough to stop rationing, but dear enough to nag margins. Wholesale electricity prices have retreated since the 2022 spike but remain roughly a tenth above their pre-war mean, with business tariffs ranging from €9 to €26 per 100kWh.
Manufacturers still fume. Chemicals, paper and basic-metal producers complain that American competitors pay half as much for gas and enjoy the hand-outs of Washington’s Inflation Reduction Act. The ECB counts those sectors among the biggest victims of the invasion-cum-energy shock. Yet subsidies alone will not rebuild competitiveness. Productivity, argue some economists, matters more than power bills. Sabrina Khanniche of Pictet sees future growth hinging “less on monetary policy and more on fiscal execution, confidence and progress on structural reforms”.
To spend or not to spend
Germany’s spending spree dominates debate because the country accounts for a quarter of EU output. Berlin’s constitutional debt brake once capped borrowing; the coalition led by Friedrich Merz has shoved it aside, promising €1tn of investment over ten years. Ben Blanchard of Absolute Strategy Research notes that “the optimism that greeted Friedrich Merz’s announcement earlier this year has faded in recent months”. Investors still await shovel-ready projects. Without them, warns Mr Feather, headline growth figures could flatter to deceive.
Across the euro zone fiscal space varies. France and Italy run deficits well above the 3%-of-GDP ceiling. Defence and reconstruction aid for Ukraine eat further into budgets. At the same time inflation, once the scourge of the bloc, has sunk towards two per cent. Three-quarters of the FT’s panellists think the ECB will leave its deposit rate at two per cent through 2026. Pia Fromlet of SEB admits: “Overall we have been positively surprised about growth resilience in 2025.” Cheap money, it seems, is no longer the sole prop.
Increased government spending will mechanically lift German growth, but the key question is whether or not it translates into a broader recovery. — Henry Cook, economist at MUFG
Risks abound. Christian Schulz of Allianz Global Investors worries that “a sharp correction in US tech valuations remains the biggest global risk”. A tumbling Nasdaq would slash household wealth and bank capital, and could yank the dollar down, raising euro-zone exporters’ prices abroad. John Llewellyn, former OECD chief economist, sounds grimmer still: “The risk of a financial crisis of some sort that spills over into the US economy and the financial sectors and economies of other countries is high and rising.”
Sanctions and scenarios
Sanctions keep tightening. The EU’s 19th package, adopted in October 2025, added more export controls and shipping-insurance bans. Brussels claims success; smuggling routes now go through the Caucasus, not through Riga. If hostilities persist into 2026—the baseline scenario with a 60 per cent probability—analysts expect gas around €30, power near €95 and GDP growth of roughly 1.5 per cent across the bloc.
A hypothetical partial ceasefire by June carries a 25 per cent chance and could shave gas to €25, lifting growth by 0.3 percentage points. The nightmare, at 15 per cent, involves sabotage of Ukrainian pipelines or European LNG terminals, doubling gas prices overnight and reviving inflation.
Even the benign scenario brings challenges. Christophe Boucher of ABN Amro Investment Solutions argues that a peace accord, provided it is “credible and not unfavourable to Ukraine”, would “significantly reduce geopolitical uncertainty and improve confidence”. How much of a chance Kyiv may have to secure any credible and not unfavourable deal, though? Think again.
Under pressure
Energy prices would fall, investment might rebound and household savings could unleash a “virtuous cycle”, says Reinhard Cluse of UBS, who dreams of a “European renaissance”. Yet Ukraine will still need billions for reconstruction. The EU will need fresh own-resources—perhaps carbon-border levies or corporate redirect taxes—to service debts raised for its NextGenerationEU fund.
Trade frictions add to the headache. The bloc’s goods surplus—€28bn in the third quarter of 2025—masks fragility. Chinese electric-vehicle makers scour Europe for market share. American tariffs could broaden if Mr Trump wins re-election. Structural reforms to labour markets, capital markets and services remain half-finished. Brussels’ new fiscal-rulebook, due to bite in 2026, will prod heavily indebted members to trim deficits just as growth flags.
The optimism that greeted Friedrich Merz’s announcement earlier this year has faded in recent months. — Ben Blanchard, economist at Absolute Strategy Research
Energy policy at least looks sturdier. Storage sites entered winter more than four-fifths full. Grid-expansion plans move faster. The European Commission urges targeted, temporary aid rather than blanket caps. It also wants tougher policing of sanction circumvention via Eurasian Economic Union countries. Whether member states comply is another matter. National priorities crowd the agenda—Germany’s subsidies, France’s nuclear push, Poland’s coal exit.
Modest outlook
Strip away the noise and a modest picture emerges. The Commission expects EU GDP to grow 1.9 per cent in 2026, the euro area 1.2 per cent. Inflation drifts towards two per cent. Unemployment holds at 6.3 per cent. Deficits stay above the Maastricht threshold in many capitals. Energy prices no longer cripple but still nag. Manufacturing stabilises, courtesy of subsidies, not dynamism. Trade with Russia disappears; links with America fray; China looms larger.
The war in Ukraine defined Europe’s economic story in 2022. By 2026 it will still shape headlines, budgets and boardroom plans; yet no longer spread panic. If gas holds at €30, if Germany spends wisely and if tariffs do not spiral, the continent can muddle through. That, for now, is enough for cautious optimism. Whether it leads to Mr Cluse’s renaissance or to Mr Cook’s disappointment depends less on Vladimir Putin than on Europe’s own will to revive its industrial flame. How encouraging a thought is it?
