Iran War and Tariff War Hit Europe Simultaneously

European Central Bank (ECB) Executive Board member Isabel Schnabel delivered a speech titled 'Monetary Policy in Times of Geopolitical Fragmentation' at the University of Zurich on March 27, 2026. The ECB's March staff projections revised the euro area growth outlook downward while flagging upside risks to inflation, as the Iran war and U.S. tariff shocks compound one another.

Three Scenarios: Baseline, Adverse, and Severe

The March projections span three scenarios. Even under the baseline, the growth path was marked down compared to the December 2025 outlook. Under the adverse and severe scenarios, the deviation in real GDP growth widens sharply. Conversely, HICP inflation in those scenarios remains well above the ECB's 2% medium-term target for an extended period. Schnabel described this as growing stagflationary pressure, with growth and inflation moving in opposite directions.

Euro-U.S. Effective Tariff Rate: From 1.5% Pre-Trump to a Peak of 13.1%

ECB data show the bilateral effective tariff rate between the euro area and the United States stood at 1.5% before the Trump administration. It surged to 10.2% by the June 2025 projection round, peaked at 13.1% in September, eased to 12.1% in December, and stood at 10.5% in the March 2026 round — still roughly seven times the pre-Trump level. The Trade Policy Uncertainty Index also approached record highs following April tariff announcements, the outbreak of the Iran war, and a Supreme Court ruling.

Domestic Demand Holds, But Export Front Is Cracking

Schnabel credited robust domestic demand and strong labour markets for the euro area's relative resilience. Decomposition of real GDP growth from 2023 to 2025 shows domestic demand (including inventories) as the primary driver, while net exports contributed little. Unemployment continued to fall, and employment kept rising.

On the export side, however, the picture is bleaker. ECB analysis of UNCTAD data shows the euro area's global market share in non-energy goods has declined steadily since 2010, while China's share surged over the same period. Revealed Comparative Advantage (RCA) data show that the number of product categories in which major euro area economies and China simultaneously hold comparative advantage has shrunk significantly from 2000 to 2024, indicating that Chinese export competitiveness is eroding Europe's manufacturing footprint.

From Globalisation to Fragmentation: A Structural Shift

Schnabel framed these dynamics as a structural transition from globalisation to fragmentation — simultaneous tariff conflicts, geopolitical confrontations, and supply-chain rewiring are exposing monetary policymakers to compound shocks that traditional models struggle to capture.

Outlook [AI Analysis]

The ECB's three-scenario framework itself signals the scale of uncertainty. The trajectory of the Iran war's impact on energy supply chains and the prospect of further U.S. tariff action are likely to be the pivotal variables in the ECB's next rate decisions. As long as domestic demand holds, the ECB is likely to resist premature rate cuts, but if the adverse or severe scenario materialises, the tension between stimulus and inflation control could intensify sharply. Structural challenges from Chinese export competition and tariff barriers are likely to remain medium- to long-term issues that monetary policy alone cannot resolve.