Eurozone recession “cannot be excluded” despite Iran ceasefire

Energy prices won’t return to normal any time soon. Even with Iran ceasefire, the world is already paying for the largest energy shock in 50 years: 12 million barrels lost per day, gas storage at rock-bottom levels, and regional LNG infrastructure damaged beyond quick repair. The question is how bad the coming winter will be.

Markets rallied this week after the US-Iran ceasefire, but the relief should not be overstated. “Part of the damage has been done,” says Carsten Brzeski, Global Head of Macro Research and chief Eurozone economist at ING. “Energy prices will not return to their pre-crisis war levels. Yes, they will come down, but they will stay at elevated war levels,” he continued. 

The war’s impact on global energy supply has been swift and severe. Ceasefire-driven relief pushed Brent futures down to around $96 a barrel this week. But the spot price for physical oil cargo remains above $124 —nearly double pre-war levels. It reflects a supply disruption that a diplomatic pause cannot immediately fix. 

The loss: 12 million barrels per day

European gas prices tell a similar story. They are down sharply from their wartime peak, but still some 40 per cent above where they stood before hostilities began. Meanwhile, a March drone strike on QatarEnergy’s Ras Laffan facility knocked out 17 per cent of Qatar’s LNG export capacity. Repairs are expected to take three to five years — damage no ceasefire can undo.

History offers a sobering benchmark for the scale of this Iran war shock. In the Iranian oil crises of 1973-74 and 1979, the world lost around five million barrels per day each time. These shocks triggered global recessions and reshaped Western energy policy for a generation. In the current conflict, the world has lost 12 million barrels per day — more than both those crises combined.

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Fortunately, Europe is not the continent it was in 1973. Renewables now account for 63 per cent of Germany’s electricity mix. Industries consume roughly one-fifth less energy per unit of output than pre-2019. The bloc is far more diversified in its supply sources.

Fragile ceasefire 

Early Wednesday, US President Donald Trump announced a two-week pause in hostilities with Iran. He described the arrangement as a “double-sided ceasefire” contingent on Iran reopening the Strait of Hormuz. Financial markets reacted with instant relief — S&P 500 futures rose more than one per cent, while oil futures sank roughly six per cent.

In a Truth Social post, Trump said a 10-point plan submitted by Tehran was a “workable basis” for negotiations.

US Vice President J. D. Vance is expected to lead the American delegation in peace talks in Islamabad on Friday. Washington and Tehran will attempt to negotiate a larger agreement to end the conflict. 

But for those who have negotiated with Iran, the terms of the ceasefire raise immediate red flags. Ben Rhodes, who served as deputy National Security Advisor under US expresident Barack Obama and helped architect the 2015 nuclear deal, was blunt in his assessment.

“Trump struck a deal to reopen the Strait that was open before the pointless war he started, with Iran demonstrating its control over the Strait and potentially extracting fees plus sanctions relief,” wrote Rhodes on X. The distance between American and Iranian negotiators remains wide. With Iran holding the upper hand, it is hard to imagine the US and Israel that will accept Iran’s terms.

Best case scenario

If the ceasefire holds and the Islamabad talks produce a durable agreement, Europe avoids the worst. But still walks away with significant wounds. “We will get away with one bigger inflation wave,” says Brzeski. 

That inflation wave is already in the pipeline regardless of what happens next. Energy prices, fertiliser costs and transportation prices have all risen sharply. The effects will now work their way through the European economy. “This wave cannot be stopped anymore.”

The European Central Bank’s (ECB) own rule of thumb, Brzeski noted, is that a permanent $10 increase in the oil price per barrel shaves roughly 0.1 percentage point off Eurozone growth. “We were at around $60 per barrel before. Do the math.” He pointed to a drag of around 0.4 percentage point on Eurozone growth even at current post-ceasefire levels.

But Brzeski was careful not to offer false reassurance. “Not enough to really see a recession in the Eurozone,” he said. “But can we exclude two consecutive quarters of contraction? No, we can’t.” With two consecutive quarters of contraction, the Eurozone would be in a recession. For consumers, the hit will be direct and visible through gas and energy prices already rising at the pump and on household bills. Companies, he argued, are more insulated.

The more likely scenario, in Brzeski’s assessment, is that the ceasefire does not hold. Tensions flare again before a permanent agreement is reached. Oil prices spike once more and Europe finds itself facing something considerably worse than a painful but manageable inflation wave. In this middle scenario, energy prices settle at elevated war levels rather than returning to pre-conflict norms. The European economy absorbs not one but a series of successive shocks.

Worst case scenario 

In the worst case—a full collapse of the Islamabad talks followed by renewed large-scale bombardment—Brzeski’s outlook turns significantly darker. “In this scenario we would have oil prices north of $150 per barrel,” At that level, he said, a technical recession in the eurozone becomes the base case, not a tail risk. “We would probably go for zero growth for the total year—but zero growth would mean in Q2 and Q3 two consecutive quarters of contraction,” he said. 

The industrial consequences would be severe and familiar. Brzeski drew a direct parallel to the first year of the Ukraine war and to the COVID-19 pandemic. “Manufacturing simply reduced or stopped production,” he said. “Because either there is no physical energy anymore, or energy costs are simply too high for production to continue.”

Depleting energy storage

Europe entered 2026 with gas storage at just 46 billion cubic metres—down from 60 bcm the previous year and 77 bcm in 2024—and has since drawn it down further to below 30 percent capacity. The EU needs to inject nearly 60 billion cubic metres during the summer refill season to hit its December target. If the Strait remains disrupted through the summer, hitting that target becomes essentially impossible.

The downstream consequences, Brzeski warned, would extend well beyond 2026. Even if a worst-case escalation were resolved by Q3, households would not feel the full impact until the following winter.

ECB between a rock and a hard place

For the European Central Bank, a collapse of the ceasefire would present a central bank caught between soaring inflation and a cratering economy, with few good options in either direction.

The fundamental problem is that this is an external shock, not a demand-driven inflation surge. The standard monetary policy response—raising rates to cool prices—does not address the root cause, which is a physical disruption to global energy supply that interest rates cannot fix. 

“The ECB will feel inclined to tackle soaring energy prices by hiking rates,” Brzeski said—potentially three times in the second half of 2026. But that response, he argued, would ultimately be self-defeating. “The economic impact will be so devastating that initially the ECB will see it as an inflation wave—trying to fight it as quickly as possible—but then realising that the adverse effects on growth are taking over.”

The fiscal wildcard

The most important variable in Europe’s response to this energy crisis in Brzeski’s assessment, is fiscal policy. What turned the 2022 energy shock into a prolonged inflation crisis, he argued, was not the shock itself but the political response to it. “There were something like 500 individual government measures to support the economy against higher energy prices,” he said, “and of course these measures then also helped that we got the second, third and fourth round effects.”

If fiscal policy kicks in full swing, the ECB’s job becomes significantly harder. If they show restraint, the inflation wave may prove shorter and shallower than 2022. “The more fiscal stimulus we get, the more we are in a 2022 to 2023 scenario,” Brzeski said. “And obviously the less we get, the lower the need for the ECB to react.”

Europe has navigated energy crises before—but never entered one with storage this depleted, LNG infrastructure this damaged, and a diplomatic process this fragile. What happens in Islamabad over the next two weeks will not resolve the damage already done. It will only determine how much worse things get.