FRANKFURT — Europeans will feel the pain of the war on Iran in their wallets this year, even if things don’t get any worse from here on, the European Central Bank warned on Thursday. The ECB’s new forecasts show that inflation is set to rise to 2.6 percent this year—well above the 1.9 percent forecast as recently as December, while growth will slow as businesses and households have to divert more of their spending power to essentials such as energy. “The war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth,” the ECB said, drawing on new quarterly forecasts for the eurozone outlook. The forecasts were published after its policy-making Governing Council left the Bank’s official interest rates unchanged, as expected. The renewed hit comes just as purchasing power was starting to recover from the last surge in prices caused by Russia’s invasion of Ukraine in 2022. That pushed headline inflation up to 10 percent within a year. On the upside, this forecast suggests that the ECB expects the problem to correct itself without it needing to raise interest rates aggressively. It sees inflation easing back towards the ECB’s 2 percent target within a couple of years, the time horizon that the ECB uses to guide its policy decisions. The economy is forecast to grow, albeit slightly less than previously expected: the Bank trimmed its forecast to 0.9 percent from 1.2 percent for this year, and to 1.3 percent from 1.4 percent for next year. Central banks are generally reluctant to respond to so-called supply shocks because their main policy tool — control over interest rates — only works with long and often uncertain time lags, while the geopolitical situation behind the supply shock can change at very short notice. However, they have to balance that against the risk of appearing complacent and letting expectations of high inflation become self-fulfilling, as constant price increases by retailers lead to more aggressive pay demands from workers. In its regular policy statement, the ECB stressed that it is “closely monitoring the situation” and will set monetary policy as appropriately. Investors have bet that this means raising the key deposit rate twice this year, to 2.5 percent. But policymakers around the globe have cautioned against rushing to such conclusions. “The thing I really want to emphasize is that nobody knows,” Federal Reserve Chair Jerome Powell told reporters following the Fed’s decision to leave rates unchanged on Wednesday. “It is too soon to know the scope and duration of the potential effects on the economy.”  ECB President Christine Lagarde is expected to echo that message at her press conference later on Thursday. However, the Bank did say that it had looked at the possible consequences of an extended disruption of global oil and gas supplies, and warned that this “would in the supply of oil and gas “would result in inflation being above, and growth being below, the baseline projections.” There is broad consensus among central bankers and private-sector economists that the longer the conflict lasts, the more likely it is to create so-called “stagflation” — a combination of economic stagnation and inflation. While the ECB, like other central banks around the world, was content to adopt a “wait-and-see” policy on Thursday, analysts don’t expect its patience to last very long. A clearer picture is expected to emerge as soon as next month. “If the current situation persists through to the April meeting, a hike becomes a distinct possibility,” according to ABN AMRO’s chief economist Nick Kounis.

BRUSSELS — Spain’s business sector isn’t sure Donald Trump will chicken out. While the country’s political class may be steadfast in its defiance against the U.S. and Israel’s war in Iran, its companies and regional leaders are scrambling to figure out what retaliation out of Washington would look like. The fear is that a transatlantic rift between Washington and Madrid, which opened after Prime Minister Pedro Sánchez refused to let U.S. military planes use jointly operated air bases on Spanish soil to attack Iran, could turn into a complete rupture. Earlier this week, the U.S. President and his Treasury Secretary Scott Bessent threatened to cut all trade ties with the EU’s fourth-largest economy in retaliation. It’s not supposed to be easy for the U.S. to bring economic pain to Spain. The EU functions as a barrier-free common market of 27 nations, a collective commercial entity that cannot be divided or fragmented with individual retaliation. But Spanish businesses aren’t taking any chances, given how vulnerable the country would be to a U.S. trade embargo. The U.S. is Spain’s leading supplier of fossil fuels. Over 15 percent of the oil Spain imported last year came from the U.S., which also provided a record 44 percent of the country’s liquefied natural gas imports last January alone. Cutting off the supply of either would be devastating amid surging energy prices from the war in the Gulf. Even though the U.S. accounts for less than 5 percent of Spain’s total global exports, suspending trade relations would have a serious impact on regions like the autonomous Basque Country, a major industrial player. “Around 8 percent of our exports go directly to the States,” Ander Caballero, the Basque government’s head of foreign affairs, told POLITICO during an interview in Brussels. “We need to see how any change in policy would be applied, but anything affecting the energy or automotive sectors, or involving machine tools, steel, and aluminum would be a source of concern.” Caballero noted that the region’s products were also part of larger value chains that involve large German, French, and British companies. “Even though the U.S. is only our fourth laregst trading partner, we could still be talking about a hit that could amount to €1 billion.” Basque Country President Imanol Pradales this week convened an emergency meeting of the region’s “Industrial Defense Group,” made up of government figures, chambers of commerce and key sectoral and business leaders, to coordinate contingency measures against the commercial turmoil stemming from the Middle Eastern conflict. The rapid-response task force was created one year ago with the mission of mitigating the regional impact of Trump’s tariff policies, which Pradales described as a “challenge unlike anything we’ve seen in decades.” This week marked the fourth emergency meeting of the group. “The Basque Country cannot control the global geopolitical landscape, but we can react quickly to protect our industry,” Pradales said. “The time it takes us to react will determine the magnitude of the impact.” The rush to prepare for the worst underscores Spaniards’ fear of the White House’s arsenal of economic weapons. So far, the most popular of these weapons has been trade tariffs. But Trump has also used sanctions to deprive his dissenters from using American credit cards and cut off countries like Iran from the world’s reserve currency. Scott Bessent has no qualms with weaponizing the U.S. dollar | Magnus Lejhall/EPA Bessent has no qualms with weaponizing the U.S. dollar, either. Earlier this year, he told POLITICO that sanctions and limits on access to the greenback enabled Washington to influence other countries’ policies “without firing bullets.” That’s of particular concern to banks, such as Spain’s largest lender, Santander, which last month agreed to acquire the U.S.’s Webster Financial Corporation, a second-tier bank. The $12.2 billion deal could catapult Santander into the top 10 American retail and commercial lenders. At the very least, a breakdown in commercial relations between Madrid and Washington could make it harder to secure necessary regulatory approvals. Santander Executive Chairman Ana Botín sought to calm shareholders on Wednesday, insisting that it was key to “look to the medium term.” While acknowledging that the current situation was “extraordinary,” she downplayed the clash, saying: “trade continues and is very strong.” “Spain and the U.S. have had an amazing relationship, forever, for centuries,” Botín told  Bloomberg TV, alluding to the Spanish crown’s financial support for George Washington in the American War of Independence, the 250th anniversary of which is being observed this year. “The long-term relationship is strong.” YET ANOTHER TACO? Of course, it’s entirely possible that Trump’s vow to cut ties with Spain will never materialize. According to market lore, whenever the risk of self-inflicted economic pain outweighs political rhetoric, “Trump always chickens out” — or TACO . None of the higher tariffs he threatened to impose on Sweden, Norway, Germany, Finland, France, the United Kingdom, and the Netherlands for their participation in military training exercises in Greenland has been implemented. Neither has the 200 percent tariff on French wine and champagne that Trump swore he’d impose on Paris after French President Macron declined to join the Board of Peace scheme to rebuild Gaza. And Madrid is still waiting to hear about the higher tariffs the U.S. president promised to use to punish Sánchez for his refusal to commit 5 percent of Spain’s GDP to military spending. Sánchez this week insisted that, no matter what Trump threatens, Spain will continue to oppose the war in Iran. José Manuel Corrales, a professor of economics and international relations at the European University in Madrid, said the Spanish prime minister’s stance is savvy because the U.S. president tends to back down when countries respond to Washington by remaining firm. “It’s worked out for Canada and México, and obviously for China,” he said. “And, politically, it’s definitely working out for Spain’s government, which is now being hailed for standing up to Trump and firmly saying no to this war.” Regardless of whether Washington cuts trade relations with Madrid, Spain’s economy is already being affected by the instability caused by the U.S. attack on Iran. Corrales said Spain’s booming economy — which grew by 2.8 percent in 2025, and is projected to expand by over 2 percent this year — could be undermined by surging inflation if the war lasts long. “The truth is that we may be facing a crisis with significant repercussions,” he said. “This latest war is already going to have consequences for the American economy, but the Trump administration is also going to have to pay for the damage it’s wrought on the global economy sooner or later.”

Christine Lagarde said her “baseline” is that she will stay at the European Central Bank until her term as president ends in October 2027. “I think that we have accomplished a lot, that I have accomplished a lot,” she said in an interview with The Wall Street Journal, published on Friday. “We need to consolidate and make sure that this is really solid and reliable. So my baseline is that it will take until the end of my term.” Her comments come two days after a report in the FT, sourced to a single person “familiar with her thinking,” suggested the opposite. The article triggered controversy, implying that the appointment of the next ECB president could be moved up to deny a possible far-right president in France any say in the matter. President Emmanuel Macron is due to step down in April next year. Lagarde played down suggestions she would be complicit in undermining the independence of the ECB from political influence by going along with any such plan. “The ECB is a very respected and credible institution, and I hope that I’ve participated in that,” she said. Lagarde’s comments to The Wall Street Journal are the latest in a series of carefully caveated statements about her future that have generally left her some wiggle room. She confirmed that she is already thinking about her next move, telling the paper that “one of the many options” she is looking at is to take over running the World Economic Forum. The WEF’s founder Klaus Schwab said last year he had discussed the possibility of her leaving the Bank early to succeed him in Davos.

Listen on * Spotify * Apple Music * Amazon Music Der EU-Sondergipfel zur Wettbewerbsfähigkeit legt Spannungen in Europa offen: Friedrich Merz drängt auf schnellen Bürokratieabbau, um die Wirtschaftswende in Deutschland voranzubringen. Doch ausgerechnet mit Frankreich wird es schwieriger. Die deutsch-französische Achse wirkt angeschlagen, während Italien bei der Frage der Deregulierung näher an Berlin rückt. Was auf dem Treffen der Staats- und Regierungschefs morgen im Schloss Alden Biesen auf dem Spiel steht und warum dieser Gipfel für Merz zu den wichtigsten Terminen des Jahres zählt, analysiert Hans von der Burchard. Mehr Insights vom EU-Sondergipfel gibt es auch in unserem ⁠PRO-Newsletter Industrie & Handel am Morgen⁠. Im 200-Sekunden-Interview von Gordon Repinski geht es um die Grundsatzfrage, ob Europa überhaupt wettbewerbsfähig sein kann. EU-Parlaments-Vizepräsidentin Katarina Barley (SPD) erklärt, wie Bürokratieabbau und Verlässlichkeit zusammenpassen sollen. Dazu der Blick in den Nahen Osten: Deutschlands Position im Israel-Palästina-Konflikt wirkt zunehmend widersprüchlich. Während Berlin die Ausweitung der Siedlungen im Westjordanland weiter rügt, setzen deutsche Politikerinnen vor Ort sehr unterschiedliche Akzente. Grünen-Chefin Franziska Brantner und CDU-Politikerin Julia Klöckner reisen zeitgleich in die Region. Mit deutlich abweichenden Botschaften. Maximilian Stascheit berichtet für POLITICO aus Israel und den palästinensischen Gebieten, wie Brantner dort auftritt, wie die Reaktionen vor Ort ausfallen und wie sie sich gerade außenpolitisch neu positioniert. Das Berlin Playbook als Podcast gibt es jeden Morgen ab 5 Uhr. Gordon Repinski und das POLITICO-Team liefern Politik zum Hören – kompakt, international, hintergründig. Für alle Hauptstadt-Profis: Der Berlin Playbook-Newsletter bietet jeden Morgen die wichtigsten Themen und Einordnungen. ⁠Jetzt kostenlos abonnieren.⁠ Mehr von Host und POLITICO Executive Editor Gordon Repinski: Instagram: ⁠@gordon.repinski⁠ | X: ⁠@GordonRepinski⁠. **(Anzeige) Eine Nachricht von Netflix: Netflix – da klingelt was? Das Unternehmen hinter Film- und Serien-Hits wie Im Westen nichts Neues und Adolescence nimmt euch diese Woche im Berlin Playbook Newsletter mit ”behind the Streams”! Erfahrt, wie Netflix als fester Teil des Medienstandorts Deutschland mit Geschichten “made in Germany” weltweit begeistert und gesellschaftliche Debatten anstoßen kann. Eine ganze Woche für Fans von Politik und Popcorn. Aufmerksames Lesen lohnt sich – Gibt auch was zu Gewinnen!** POLITICO Deutschland – ein Angebot der Axel Springer Deutschland GmbH Axel-Springer-Straße 65, 10888 Berlin Tel: +49 (30) 2591 0 ⁠information@axelspringer.de⁠ Sitz: Amtsgericht Berlin-Charlottenburg, HRB 196159 B USt-IdNr: DE 214 852 390 Geschäftsführer: Carolin Hulshoff Pol, Mathias Sanchez Luna

The European Central Bank held its key deposit rate at 2 percent for a fifth consecutive meeting on Thursday, as policymakers weighed fresh geopolitical shocks and a stronger euro that could complicate the inflation outlook for the eurozone. The ECB said that its updated assessment “reconfirms that inflation should stabilize at its 2 percent target in the medium term” and that the “economy remains resilient.” At the same time, the central bank warned that “the outlook is still uncertain, owing particularly to ongoing global trade policy uncertainty and geopolitical tensions.” Since the ECB last met in December, global risks have intensified. U.S. President Donald Trump threatened new tariffs — or worse — to secure control over Greenland and launched his most aggressive attack yet of the U.S. Federal Reserve, triggering a broad sell-off in the dollar. That pushed the euro briefly to its highest level since 2021, raising concerns among some ECB policymakers that currency strength could drag inflation further below the ECB’s 2 percent target. While data released early this week showed inflation sinking to 1.7 percent in January, the most recent ECB staff forecasts see it returning to target by 2028. A continued appreciation of the euro, however, risks pushing inflation below target more durably and may thus require ECB action, French central bank chief François Villeroy de Galhau has warned. The euro has eased from its $1.20 peak to around $1.1780 as of Thursday, tempering immediate concerns. But analysts said exchange-rate volatility is likely to remain elevated, with investors watching ECB President Christine Lagarde’s 2:45 p.m. CET press conference for clues on how policymakers are reassessing risks — and the outlook for rates.

Listen on * Spotify * Apple Music * Amazon Music Das Berlin Playbook als Podcast gibt es morgens um 5 Uhr. Gordon Repinski und das POLITICO-Team bringen euch jeden Morgen auf den neuesten Stand in Sachen Politik — kompakt, europäisch, hintergründig. Und für alle Hauptstadt-Profis: Unser Berlin Playbook-Newsletter liefert jeden Morgen die wichtigsten Themen und Einordnungen. Hier gibt es alle Informationen und das kostenlose Playbook-Abo. Mehr von Berlin Playbook-Host und Executive Editor von POLITICO in Deutschland, Gordon Repinski, gibt es auch hier:   Instagram: @gordon.repinski | X: @GordonRepinski. POLITICO Deutschland – ein Angebot der Axel Springer Deutschland GmbH Axel-Springer-Straße 65, 10888 Berlin Tel: +49 (30) 2591 0 information@axelspringer.de Sitz: Amtsgericht Berlin-Charlottenburg, HRB 196159 B USt-IdNr: DE 214 852 390 Geschäftsführer: Carolin Hulshoff Pol, Mathias Sanchez Luna

The European Central Bank kept its key interest rate unchanged at 2 percent on Thursday as fresh staff projections painted a brighter future ahead for the eurozone economy after a rollercoaster year. The Bank revised up its forecast for growth this year to 1.4 percent from 1.2 percent three months ago, reflecting the fact that the destructive trade war with the U.S. that many feared six months ago hasn’t materialized. It also expects the economy to grow 1.2 and 1.4 percent over the two coming years, up from 1.0 percent and 1.3 percent previously. The ECB’s first-ever projections for 2028 put growth at 1.4 percent. The new numbers are likely to lock in the view that the ECB — which has now left rates unchanged for the fourth meeting in a row — is heading for an extended period on the sidelines. Most economists and investors now expect borrowing costs to remain unchanged throughout 2026, barring a major economic shock. “Economic growth is expected to be stronger than in the September projections, driven especially by domestic demand,” the ECB said in its statement, repeating again that it will respond to any material changes if incoming economic data demand it. The ECB has become gradually more upbeat since the EU decided not to escalate trade tensions with the U.S., and since the risk of a regional conflict in the Middle East receded. That helped the economy to grow by a stronger-than-expected 0.3 percent in the third quarter, and business surveys suggest that it has continued to expand through the year-end. The ECB also updated its inflation forecasts for the next two years, and now sees inflation at 1.9 percent in 2026 and 1.8 percent in 2027. That is little changed from 1.7 and 1.9 percent respectively three months ago. The first inflation forecast for 2028 sees prices right back at the 2 percent level that the ECB considers to represent price stability. While the new forecasts will likely have secured broad backing for today’s decision, Governing Council members have diverging views on the years ahead. Executive Board member Isabel Schnabel said last week she believes the next move is likely to be up, while Finland’s central bank governor Olli Rehn kept the door to further easing ajar, warning that downside risks to the inflation outlook still dominate. ECB President Christine Lagarde will hold her regular press conference at 14:45 CET, and will likely give a sense of where she stands on that debate.

BRUSSELS — The European Commission on Tuesday slapped a red flag on Finland for spending too much and warned others to tighten their belts to avoid getting the same treatment.  The EU executive unveiled the full list of countries that are overspending, as part of the Commission’s biannual “European Semester” that checks whether governments are within the EU’s rules for public spending.  Red flags, known as excessive deficit procedures (EDPs), signal concerns about countries’ financial health to investors. Brussels can impose a fine if governments refuse to adopt measures to bring their finances back in line. Brussels reintroduced the EU’s rules for public spending last year after the Commission gave capitals free license during the pandemic, which plunged the EU’s economy into the worst recession since the Second World War. While the bloc’s economy has picked up this year, many governments are struggling to comply with the EU’s rules amid trade tensions with the U.S. and mounting defense budgets to deter Russian aggression. One of the countries on Russia’s doorstep, Finland, was reprimanded for exceeding the EU’s cap on budget deficits, which limits how much a country can spend beyond what it collects in taxes.  Economy Commissioner Valdis Dombrovskis. | Thierry Monasse/Getty Images The rules limit the deficit to 3 percent of a country’s economic output. Recent tweaks to the rules allow governments to spend an additional 1.5 percent of GDP on defense. But the numbers still don’t add up for Helsinki. “The deficit in excess of 3 percent of GDP is not fully explained by the increase in defense spending alone,” Economy Commissioner Valdis Dombrovskis told reporters in Strasbourg. Germany narrowly avoided the same punishment. Separately, the Commission checked whether governments’ expected spending in 2026 complies with their five or seven-year plans that were approved by Brussels. So far, Croatia, Lithuania, Slovenia, Spain, Bulgaria, Hungary, the Netherlands, and Malta aren’t doing enough. Failure to act could see Brussels reprimand the eight countries at the next European Semester in June.  POLITICO took a deeper look at some of the key countries and graded their current performances. FINLAND: E The Nordic state got a slap on the wrist from Brussels as its deficit is set to exceed the EU’s limit for the next two years. Once a paragon of fiscal stability, Finland is now in the same EDP basket as the indebted nations of France, Italy, and Belgium. As a result, Helsinki will have to reduce the deficit. That’s a tall order for a country facing overstretched social and health budgets, as well as a ballooning defense bill. ROMANIA: D+ Romania can breathe a sigh of relief after today’s announcement. Dombrovskis praised the country’s recent economic reforms and ruled out triggering the nuclear option — a suspension of the country’s payouts from the EU budget, which are worth billions.  But the country is not out of the woods. At 8.4 percent of GDP, its 2025 deficit remains by far the highest in the EU, and painful domestic reforms will be required to reduce it significantly in the years to come. GERMANY: C The country’s budget deficit is expected to reach 3.1 percent of GDP this year. That’s technically a breach of the rules. But Brussels refrained from punishing the bloc’s economic powerhouse, because the breach is “fully explained by the increase in defense spending,” the Commission said in a statement. But there is trouble ahead. Germany plans to continue its spending spree next year to juice growth, only curbing expenditure later. That won’t be easy, as China threatens the country’s export-driven economy and Chancellor Friedrich Merz’s grand coalition needs to deliver reforms to revive growth. Berlin is taking a huge gamble. Brussels too. FRANCE: C- France is in the middle of a budget crisis and is not even sure that it will manage to adopt the 2026 budget by the end of this year. That doesn’t seem to worry Brussels too much for the time being, especially considering that France received its EDP red flag in 2023. The Commission found that the French budget plans for next year are compliant with its recommendations and encouraged Paris to continue on this path.  But not even France’s prime minister knows what his budget for next year will look like. Sébastien Lecornu has pledged to bring the deficit down to 5 percent of GDP. But that goal is at risk, as contradictory amendments to the draft budget in parliament undermine the chances of a deal before Christmas. HUNGARY: F  Hungary is facing a worrying situation because it’s not making the necessary cuts in 2026 to exit the EDP. For now, the Commission has merely warned Hungary to cut spending in 2026. But if Budapest ignores such calls, Brussels might threaten to issue fines during its next budget review in Spring. Hungarian Prime Minister Viktor Orbán is unlikely to heed Brussels’ calls as the country is heading to the polls next spring and he faces the risk of losing power after almost a decade.  ITALY: B- Has Europe’s perennial fiscal bad boy turned good? That’s what it looks like, with Italy’s deficit set to fall to 2.6 percent of GDP next year, while government spending is forecast to stay below the limits imposed by the EU’s fiscal rules. That puts it on track to exit its EDP, if it can prove that debt is set to trend lower in the long term. Other good news: Rome’s tax take is trending above economic growth, helping to fill its coffers and pay down debt.  It’s not all good news. Italy remains the second-most indebted country in the EU. That isn’t changing next year, with government debt expected to increase to 137.9 percent of GDP. But any positive change is welcome, especially when it’s the class clown who is finally hitting the books.

BRUSSELS — The EU’s economy is set to expand by 1.4 percent this year, driven in large part by Poland’s and Spain’s growth. That’s according to the European Commission’s forecasts, presented on Monday. Outperforming most European countries, Warsaw and Madrid are set to grow by 3.2 percent and 2.9 percent in 2025. The EU’s economic outlook is a slight improvement from last spring’s forecast at 1.1 percent. The Commission expects the bloc’s economy to continue growing at a rate of 1.4 percent next year, despite the U.S.’ slapping 15 percent tariffs on European exports. In further good news, the unemployment rate is set to remain below 6 percent through 2027, while inflation will shrink to 2.2 percent within the same time period. Economy Commissioner Valdis Dombrovskis urged the bloc to capitalize on the momentum. “Now, given the challenging external context, the EU must take resolute action to unlock domestic growth,” such as “simplifying regulation, completing the Single Market, and boosting innovation,” Dombrovskis said in a statement. In a striking reversal, the poster boys of the eurozone crisis — Portugal, Greece, Cyprus, Ireland, and Spain — are set to outperform countries such as Germany, Finland, and Austria that were once seen as economic models. In a worrying sign for Europe, its three largest economies — Germany, France, and Italy — are set to experience weak growth over the coming years. Once the engine of European growth, Germany is set to expand by 0.2 percent in 2025 and 1.2 percent in 2026 and 2027. Italy is estimated to grow at an even more sluggish pace — 0.4 percent in 2025 and 0.8 percent in 2026 and 2027 — despite being the main beneficiary of the EU’s post-COVID recovery program. This stands in contrast to the strong economic growth in 2025 in Southern and Eastern countries such as Malta (4 percent), Bulgaria (3 percent), Lithuania (2.4 percent) and Croatia (3.2 percent).

VIENNA — Donald Trump’s trade war has been less damaging for Europe’s economy than widely feared, and there is a hope that a stable recovery is underway, European Central Bank governing council member Martin Kocher said.  “We have not seen the strong reduction in growth rates and the inflationary effects of the trade conflicts that were anticipated in March and April,” the Austrian National Bank governor told POLITICO in an interview on Wednesday. On the same day that a closely-watched business survey pointed to an unexpected and marked pickup in activity in October, Kocher suggested there were emerging signs of an economic pickup. Kocher, who served as economy minister before joining the central bank in September, nonetheless warned against complacency. “I don’t want to sugarcoat what we are seeing,” he said. “This is the highest level of tariffs since the 1930s, and there will be effects on the world economy.” The impact on the eurozone will be exceptionally difficult to predict because we have not experienced anything similar in nearly 100 years, Kocher said, adding that this was the primary reason for diverging views about the ideal monetary policy path ahead on the ECB’s governing council. Falling inflation has allowed the ECB to cut its key deposit rate eight times since the middle of last year, bringing it down from a record-high 4 percent to 2 percent currently — a level that the Bank says is no longer restricting the economy. A behavioral economist rather than a monetary one, Kocher is one of the newest faces on the governing council, having succeeded Robert Holzmann earlier this year. Most analysts expect a more moderate approach from him than from the veteran hawk Holzmann, who was often the lone dissenter on the rate-setting body. The governor’s office leaves no doubt there is a change in style underfoot — the wooden desk replaced by a modern, height-adjustable table and new, colorful paintings by Austrian artists Wolfgang Hollegha and Hans Staudacher on the wall. While policymakers unanimously agreed to keep interest rates on hold last week, ECB President Christine Lagarde revealed that “there are different positions and different views” on whether the Bank may yet have to cut them one more time. “The difficulty is to assess whether most of the effects of the trade conflicts have already materialized or whether we will see them trickle down in the economy over the next couple of months and perhaps even years,” he said. “I’m convinced that we’ll see more effects over time. But whether they will be overall inflationary, or rather disinflationary in the euro area, is difficult to tell.” RISKY OUTLOOK Kocher explained it’s reasonable to expect deflationary pressure from the rerouting of trade from China to Europe that was flowing to the U.S. before the trade conflict began, but it’s equally plausible that geopolitical conflicts may hamper supply chains and boost prices. And things can change very fast. “Last week’s APEC summit with some interim agreement between the U.S. and China might have changed the outlook again,” he noted. While policymakers unanimously agreed to keep interest rates on hold last week, ECB President Christine Lagarde revealed that “there are different positions and different views” on whether the Bank may yet have to cut them one more time. | Nikolay Doychinov/AFP via Getty Images At the summit, the U.S. and China committed to lowering the temperature in their trade and tech rivalry. The so-called “Gyeongju Declaration” called for “robust trade and investment” and committed leaders to deepen economic cooperation. In this environment, “we have to wait and see to what extent [risks] materialize” as it’s difficult to take rate decisions “primarily based on the risk outlook,” Kocher said. As things stand, he said, the ECB would need to “see some risk materializing that would reduce … the GDP projection to a significant extent, and that would lead perhaps to some disinflationary effects” before it discussed cutting again. The governing council next meets in December, when a new set of forecasts will include estimates for growth and inflation in 2028 for the first time. Kocher warned against placing too much emphasis on the 2028 numbers, which many economists and investors focus on as an indication of whether the Bank is on track to meet its medium-term inflation target. While the forecast will offer more certainty about the outlook for 2026 and 2027, that for 2028 will be little more than “indicative,” he argued. “You always have to take projections with a grain of salt. And the further away the projection horizon, the larger the grain of salt.” GREEN BATTLE CONTINUES Kocher was speaking on the day that a majority of the EU’s 27 governments decided to water down their collective target for pollution reduction, seen by many as a sign that political momentum has swung after half a decade of green victories on climate policy. But Kocher fiercely defended the ECB’s commitment to green central banking. “Whatever is decided today, there’s no significant change in the targets of the European Union to become climate neutral in the near future,” Kocher said. And so long as it does not interfere with the ECB’s inflation-targeting mandate, the ECB has the “freedom” to support those objectives. He said the governing council had reaffirmed the view, even in the last couple of months, that it is essential to take climate risks into account in its projections, citing the massive impact that extreme weather events can have on growth and inflation. In contrast to his predecessor, Kocher also backs the inclusion of a climate criterion in the Bank’s collateral framework, a step that could one day make it more expensive for polluting companies than for green ones to borrow money. Critics of green central banking have argued that it is up to elected politicians, rather than central bankers, to create incentives for green business. But Kocher, a former downhill racer who has seen Austria’s key tourism sector struggle with an ever-shorter ski season, is unconcerned. “As long as it does not create a trade-off with our inflation target, I am perfectly fine with it,” he said.