Rabobank strategists have highlighted a significant stagflationary shock to the Eurozone economy as a result of the Iran conflict, which has led to rising energy prices and deteriorating economic conditions. As a net energy importer, the Eurozone is particularly vulnerable to these price increases, which have eroded real incomes, squeezed corporate margins, and dampened both consumption and investment. The strategists note that these pressures, combined with government support measures, are straining public finances and contributing to a challenging economic outlook [1].
The report details that higher risk and inflation premia, along with expectations of policy rate hikes, have pushed long-term interest rates higher. Specifically, the 10-year EUR swap rate has increased by about 30 basis points since the end of February. Rabobank currently assumes one rate hike this year, while market pricing suggests two. Based on current energy price forecasts, Eurozone inflation is expected to average 3.1% in 2026 before easing to 2.5% in 2027, both figures remaining above pre-war projections. Cumulative inflation over these two years is projected to be 1.7 percentage points higher than previously forecasted [1].
Growth prospects have also dimmed, with GDP growth expected to slow from 1.5% in 2025 to 0.6% this year, followed by only a modest rebound to 0.9% next year. The strategists warn that the window for a milder scenario—where energy flows resume quickly—has essentially closed, and the risk of a more severe scenario remains. Should the situation in the Gulf region worsen or persist, the Eurozone could face 'non-linear' effects such as severe demand destruction, de-industrialization, and widening credit and sovereign risk premiums [1].
CONCLUSION
Rabobank's analysis underscores a high risk of prolonged stagflation in the Eurozone due to the Iran conflict's impact on energy prices and economic growth. With inflation expected to remain elevated and growth subdued, the outlook for the region remains challenging, especially if geopolitical tensions persist or escalate.