Iran War Energy Fallout Slows Euro Area Growth and Drives Up Inflation

The euro area is facing a sharper-than-expected slowdown as the economic fallout from the Iran war pushes up energy costs, strains businesses and threatens to keep inflation elevated, according to new forecasts from the European Commission and the IMF. The Commission said the region will grow more slowly than previously expected, while inflation is set to rise to its fastest pace since 2023 as households and firms absorb higher fuel and power bills.

The outlook is especially worrying for export-heavy economies and countries already dealing with weak domestic demand. The Commission warned that the energy shock is hitting the bloc just as growth momentum was already softening, leaving little room for recovery in the near term. That matters because the euro area depends heavily on stable energy prices to support consumer spending, industrial output and trade, all of which are now under pressure.

France is among the countries feeling the strain. The IMF cut its forecast for French growth this year and warned that uncertainty remains unusually high, with the war adding to economic headwinds and political questions building ahead of next year’s presidential election. The European Commission separately projected that France will grow by just 0.8% in 2026, with inflation still above the European Central Bank’s 2% target in the years ahead.

Broader IMF analysis also points to a loss of momentum across the global economy. According to the fund’s latest World Economic Outlook, trade policy uncertainty, rising tariffs and war-related energy disruptions are weighing on investment, consumer confidence and cross-border trade. The IMF said higher tariffs imposed by the United States are curtailing demand in several export-oriented economies, while protectionist measures and geopolitical tensions are making it harder for businesses to plan ahead.

For Europe, the key concern is that higher inflation and slower growth are arriving together. That creates a difficult policy choice for central banks and governments: support economic activity without adding to price pressures. It also raises the risk that households will cut spending further as energy and food costs remain elevated, which could deepen the slowdown.

Officials in Brussels and Washington are expected to keep a close watch on whether the war-induced energy crunch becomes more persistent. For now, the message from the latest forecasts is clear: the euro zone is no longer just slowing — it is buckling under the weight of a shock that is hitting growth, prices and confidence at the same time.