A note on sourcing: This issue draws on data and statements published through 18 March 2026, covering the period since the outbreak of the Iran conflict in late February. Inflation figures are the latest available national releases for February 2026. GDP figures refer to Q4 2025 preliminary or first estimates. Where data reflects modelled projections rather than observed outcomes, this is noted in the text. Confidence in headline macroeconomic data is high; confidence in forward-looking scenarios is, by nature, lower.
Each week, the ESCP Economics Society picks one economic story worth understanding in depth: something emergent, contested, or simply underreported. This week we examine why the European Central Bank finds itself unable to move clearly in either direction - and why a new energy price shock may have made that problem significantly worse.
For most of the past three years, the story of European economics has been dominated by one question: how do you bring inflation back under control without breaking the economy in the process? The European Central Bank - the institution responsible for keeping prices stable across the nineteen countries that share the euro - responded by raising interest rates at the fastest pace in its history. Borrowing became more expensive. Mortgages, business loans, government debt: all of it costs more. The hope was that higher costs would cool spending, slow price growth, and eventually bring inflation back to the ECB’s 2% target.
That strategy appears, on the surface, to have worked. Eurozone-wide inflation is now close to that 2% level. (Eurostat, February and March 2026) For many observers, this is the moment the ECB should begin reversing course - cutting rates gradually, easing the pressure on households and businesses, and allowing the economy room to recover. And yet the ECB is not doing that. It is waiting, watching, and declining to commit.
The reason is not stubbornness. It is that the situation beneath the headline numbers is considerably more complicated than it looks. Inflation is not falling evenly across all countries. Economic growth is weak, but not uniformly so. And the ECB does not set policy in isolation - what America’s central bank does matters enormously for what Europe can and cannot do. Add to this a fresh energy price shock triggered by the Iran conflict in late February 2026, and the result is a central bank facing pressure from multiple directions at once, unable to move decisively in any of them.
This week’s brief explains the three forces trapping the ECB, what the picture looks like across our six campus cities, and why a single decision in Frankfurt,where the ECB is headquartered, has consequences that reach all the way to your next rent payment, job offer, or student loan.
The three-sided trap
The ECB’s position is best understood not as a single dilemma but as three simultaneous problems pulling in different directions. Each one alone would be manageable. Together, they leave the ECB in a position where any move it makes carries real risk - and where doing nothing carries risks of its own.
1 | Core inflation is still too high in too many places
To understand why this matters, it helps to know the difference between headline inflation and core inflation:
Headline inflation is the number you hear in the news - it reflects the overall rise in prices across the economy, including energy and food.
Core inflation strips those out, because energy and food prices swing sharply from month to month depending on weather, harvests, and geopolitical events. Core inflation is therefore considered a better guide to whether price pressures are deep-rooted or just temporary.
The problem for the ECB is that core inflation is still running above its 2% target in several of the eurozone’s largest economies. In Italy, the headline rate looks fine, but core price growth, running well above 2% - tells a different story. (Istat, March 2026) Spain is in a similar position. Even Germany - whose economy is barely growing - has a core rate above target. France is the one genuine exception, with both its overall and core inflation unusually low, a sign that the French economy has genuinely cooled. (INSEE, February 2026)
This patchwork of results poses a communication challenge for the ECB. If it cuts rates now, it risks sending the message that it is satisfied with inflation - even in countries where underlying price growth has not yet fully returned to target. That risks undermining the credibility it spent the past three years rebuilding. Credibility matters because inflation expectations are partly self-fulfilling: if households and businesses believe prices will keep rising, they demand higher wages and raise their own prices, making inflation harder to bring down.
2 | Growth is too weak to keep rates high for much longer
The argument for cutting rates, on the other hand, is straightforward: the European economy is struggling. High interest rates work by making borrowing more expensive. That slows spending, which cools inflation - but it also slows growth. And across most of Europe, growth is already very slow.
Germany, France, Italy, and the United Kingdom all recorded only marginal economic growth in the final quarter of 2025. (Destatis, INSEE, Istat, ONS - Q4 2025 preliminary estimates) This is not just an inconvenience. Slow growth means less tax revenue, which puts pressure on government budgets that in several countries are already stretched. It means businesses delay hiring and investment. It means households become more cautious. Over time, a long period of slow growth can cause lasting damage that is difficult to reverse.
Poland is the clear outlier here. It uses its own currency, sets its own interest rates, and is growing at a considerably stronger pace than its western neighbours. (GUS - Q4 2025) For the rest, the pressure on the ECB to ease is real. The longer it waits, the more economic damage accumulates - and the louder the political calls to act become.
3 | The ECB cannot ignore what happens across the Atlantic
The third constraint is one that rarely comes up in everyday conversation but is nonetheless significant: the ECB cannot make its decisions without considering what America’s central bank - the Federal Reserve, or simply the Fed - is doing at the same time.
Here is the basic logic: when the Fed keeps interest rates high, investors around the world find dollar-denominated assets more attractive. They move their money into the US, which increases demand for dollars and reduces demand for euros. The result is a weaker euro. And a weaker euro has a very direct consequence for Europe: since oil and gas are priced globally in US dollars, every barrel of imported energy becomes more expensive when measured in euros. That extra cost filters through the economy - into electricity bills, petrol prices, transport costs, and the price of anything that needs to be made or moved.
Academic research confirms that this currency channel is a meaningful driver of inflation in the eurozone. (BIS Working Paper No. 1049; ECB Working Paper No. 2834) The practical implication is this: if the ECB cuts rates significantly before the Fed does, it risks weakening the euro, making energy imports more expensive, and inadvertently pushing inflation back up. It would be, in effect, undoing with one hand what it spent three years achieving with the other.
The view from six cities
Abstract as all of this may sound, the ECB’s dilemma plays out very differently depending on where you are. The six cities where ESCP maintains campuses - Berlin, Paris, Madrid, London, Turin, and Warsaw - each face a distinct version of the same problem. What looks like the right move for one economy can be exactly the wrong move for another - and yet all nineteen eurozone members must live with the same decision.
In Germany, the picture is genuinely contradictory, and it illustrates the ECB’s dilemma particularly well. On the one hand, Germany’s overall inflation rate is close to the ECB’s target, which might suggest there is room to cut rates and give the economy some breathing space. On the other hand, look beneath that headline figure and underlying price growth - particularly in services like restaurants, repairs, and healthcare - is still running above target. Germany’s economy, Europe’s largest, is barely growing, and while unemployment remains relatively low by historical standards, it has been edging upward. The result is a country caught between two conflicting signals: an inflation picture that argues for caution, and a growth picture that argues for relief. Berlin cannot have both at once. (Destatis / Bundesbank, February 2026)
In France, the situation looks unusual by European standards, and in some ways it is the most straightforward case for rate cuts among the major eurozone economies. Both overall and core inflation are running well below the ECB’s 2% target - a clear sign that the French economy has slowed more sharply than most. (INSEE, February 2026) Consumer spending has cooled, and businesses are cautious about investing. In purely domestic terms, France would benefit from lower borrowing costs more immediately than almost any of its neighbours. The catch, of course, is that France cannot set its own interest rates. As a eurozone member, it shares a single monetary policy with eighteen other countries - including Spain and Italy, where inflation is running considerably higher. France must wait for a decision that reflects the entire union, not just its own needs.
In Italy, the situation is more complicated than the headline numbers suggest. Overall inflation is comfortably below the ECB’s target, which sounds reassuring. But dig deeper and a persistent problem emerges: the cost of services - restaurants, transport, healthcare, leisure - is rising well above 3%, driven by wage growth and steady domestic demand. (Istat, March 2026) This matters because service price inflation is generally harder to bring down than goods inflation, since it is driven by domestic wages rather than global commodity prices. On top of this, Italy carries one of the highest public debt levels in Europe. That makes the country acutely sensitive to any shift in market confidence: if investors begin to worry about Italy’s ability to manage its debts, they demand higher interest rates to hold Italian government bonds. A rate cut that unsettles markets in this way could paradoxically result in higher borrowing costs for Italian households and firms - exactly the opposite of what easing is supposed to achieve.
In Spain, both overall and core inflation are running above the ECB’s target, making Spain one of the clearest arguments against an early rate cut. The Spanish economy has grown strongly in recent years - more strongly than most of its eurozone neighbours - driven by a combination of immigration, a booming tourism sector, and resilient domestic spending. That dynamism has kept price pressures elevated even as other economies slowed. What makes Spain’s case particularly striking is that unemployment remains high by European standards, yet prices are still rising. This challenges the simple assumption that high unemployment always means weak inflation. Spain shows that structural factors - like housing shortages, concentrated labour markets, and tourism-driven demand - can keep prices rising even when a large share of the population is out of work. (INE, February 2026)
In Warsaw, the situation is the most positive of the six, and it stands out for an important structural reason. Poland uses its own currency, the zloty, and sets its own interest rates through the National Bank of Poland. This means Warsaw is not bound by the ECB’s decisions in the way that Berlin, Paris, Madrid, and Turin are. Poland is growing strongly, inflation is close to target, and unemployment is very low - a combination that most of its western neighbours can only envy right now. (GUS, NBP - Q4 2025 and February 2026) That said, Poland is not entirely insulated. As one of Europe’s major logistics and transit hubs, its transport sector is directly exposed to diesel price increases. And if the broader European economy slows significantly, Polish exporters will feel it too. Poland’s independence from the ECB is a real advantage, but it does not make the country immune to what happens across the rest of the continent.
The United Kingdom sits outside the eurozone entirely, but that does not insulate it from the same forces. UK economic growth in the final quarter of 2025 was the weakest among our six countries, and the labour market has been softening gradually. (ONS, February 2026) London, as one of the world’s most globally connected financial centres, is particularly sensitive to shifts in investor sentiment and to changes in dollar-denominated funding costs - the rates at which banks and businesses borrow in US dollars, which underpin a significant share of global finance. An energy price shock that simultaneously raises inflation and weakens growth puts the Bank of England - the UK’s equivalent of the ECB - in exactly the same bind. It faces the same impossible trade-off between controlling prices and supporting a struggling economy, just with a different currency, a different political context, and no shared decision-making with its European neighbours.
The bottom line
On top of everything described above, the ECB is not making these decisions in a calm environment. The Iran conflict that began in late February 2026 has added a new and unpredictable layer of risk at the worst possible moment. Europe imports the vast majority of its gas and a large share of its oil, meaning that when energy prices rise globally, the cost lands on households and businesses within weeks. European wholesale gas prices rose by roughly 29% in a single week after the conflict escalated. (S&P Global, 9 March 2026) The International Energy Agency responded by coordinating the release of strategic oil reserves - a step reserved for genuine supply emergencies. (IEA, March 2026) For the ECB, this is not background noise. If it cuts rates while energy prices are rising and the euro is weakening against the dollar, it risks making imported energy even more expensive and reigniting the inflation it has spent three years trying to bring down. (ECB Working Paper No. 2834)
Taken together, the picture is one of a central bank caught from multiple sides. Inflation is close to target, but core price growth remains stubborn in several key economies. Growth across the continent is too weak to sustain high borrowing costs comfortably. The Federal Reserve’s decisions in Washington constrain what Frankfurt can do. And an energy shock has arrived to remind everyone that the fall in inflation over the past two years was partly driven by falling energy prices - a tailwind that can reverse at any moment.
What policymakers are most trying to avoid is a chain reaction that Europe lived through between 2021 and 2023: energy prices rise, inflation expectations climb, central banks are forced to raise rates sharply, and growth slows sharply as a result. The ECB’s carefully worded signals in March 2026 - neither committing to cuts nor ruling them out - reflect exactly that concern. ECB Governing Council member Joachim Nagel put it plainly: if the inflation impact of the conflict proves broad-based, the ECB will act decisively. (Reuters, 11 March 2026) That is the kind of statement a central bank makes when it genuinely does not yet know what it will need to do. And that uncertainty, for now, is the defining feature of the European economic outlook.
For ESCP students thinking about the years ahead, the practical takeaway is this: do not assume that borrowing costs will fall quickly or predictably. Whether you are thinking about renting an apartment, taking out a student loan, or evaluating the financial health of a future employer, interest rates will be shaped by forces that go well beyond any single data release - a conflict in the Middle East, a decision in Washington, and an energy market that Europe imports but does not control.
Sources: Eurostat - Euro area inflation flash estimates, February and March 2026 · Eurostat - Unemployment by country, January 2026 · Deutsche Bundesbank / Destatis - Germany HICP and core inflation, February 2026 · Destatis - Germany GDP Q4 2025 · INSEE - France CPI / HICP / inflation sous-jacente, February 2026 · INSEE - France GDP Q4 2025 · Istat - Italy consumer prices, February 2026 · Istat - Italy GDP Q4 2025 preliminary estimate · INE - Spain HICP and core, February 2026 flash · Statistics Poland (GUS) - Poland CPI, February 2026 · NBP - Poland core inflation, February 2026 · GUS - Poland GDP Q4 2025 · ONS - UK labour market overview, February 2026 · ONS - UK GDP Q4 2025 first estimate · IEA - IEA member countries to release 400 million barrels, March 2026 · S&P Global Energy Intelligence - European gas prices (TTF), 9 March 2026 · Reuters - ECB / Nagel statement, 11 March 2026 · BIS Working Paper No. 1049 - Spillovers from US monetary policy · ECB Working Paper No. 2834 - Exchange rate pass-through to euro area inflation · UK DESNZ - UK Energy in Brief 2025. Energy price figures reflect market conditions as of 18 March 2026 and should be treated as indicative.
Next week: Have a topic you think deserves coverage? Reach out to the Economics Society via your ESCP campus student portal.