Technology and renewable energy help euro area withstand fresh economic shocks, ECB says

Greater energy efficiency, expanding renewable power, government investment and the global artificial intelligence boom have helped the euro area maintain economic growth despite renewed geopolitical tensions and rising energy costs. However, the European Central Bank warns that the factors supporting the economy may not last, calling for deeper structural reforms to strengthen Europe's resilience.

The euro area economy has demonstrated greater resilience than anticipated in the face of renewed geopolitical tensions and a fresh energy price shock, with improvements in energy efficiency, the expansion of renewable energy, increased government spending and the global artificial intelligence investment boom helping to limit the economic damage.

According to an analysis published by European Central Bank (ECB) officials Óscar Arce, Gerrit Koester and Beatrice Pierluigi, the euro area has continued to expand despite considerable international uncertainty and repeated disruptions to global supply chains and energy markets.

The latest developments have tested an economy that has already experienced several major shocks in recent years, including the Covid-19 pandemic, post-pandemic supply shortages, the energy crisis following Russia's invasion of Ukraine, disruptions to shipping through the Red Sea and trade tensions associated with US tariffs.

Despite these challenges, economic output has maintained a moderate upward trajectory since 2022, with the latest energy shock having a relatively limited impact on growth so far.

The ECB's analysis highlights that, excluding Ireland, where economic statistics can be particularly volatile, real gross domestic product (GDP) in the second quarter of 2026 was 0.6 per cent higher than in the final quarter of 2025.

Furthermore, the euro area recorded quarterly growth of approximately 0.3 per cent in each of the previous four quarters, performing better than forecasts had anticipated.

The central bank attributes this resilience to three interconnected capabilities: the ability to absorb economic shocks, recover from their immediate consequences and adapt economic structures to reduce vulnerability to future disruptions.

However, the ECB stresses that the improvements are not all equally permanent. Some reflect structural changes in the European economy, while others depend on temporary government support and favourable international developments.

Reduced dependence on fossil fuels limits energy shock

One of the most important factors behind the euro area's improved resilience has been its declining dependence on fossil fuels.

Over the past three decades, businesses and households have improved energy efficiency, reduced their reliance on oil and gas and gradually shifted economic activity towards less energy-intensive industries, particularly services.

The euro area economy is now approximately half as dependent on oil as it was in the early 1990s, a structural change that has reduced its exposure to fluctuations in international energy markets.

The latest energy shock developed in two distinct phases.

Initially, the conflict in the Middle East triggered a sharp increase in oil prices. Prices subsequently eased following a June memorandum of understanding between the United States and Iran.

A second wave of disruption began in July, bringing another substantial increase in oil prices, sharp rises in refining margins and persistently elevated natural gas prices.

Nevertheless, the reduced energy intensity of the European economy has helped contain the consequences for economic growth, household consumption and business investment.

The ECB considers the transition towards renewable energy particularly important in reducing the transmission of international gas price increases into domestic electricity costs.

As renewable electricity generation expands, gas-fired power stations are increasingly setting electricity prices for fewer hours, reducing the influence of natural gas prices on wholesale electricity markets.

Spain provides a particularly clear example of this development. The proportion of hours during which gas-fired power stations determined electricity prices declined from approximately 80 per cent in 2020 to slightly above 20 per cent in 2026, based on the first nine months of each year.

France recorded a similar reduction, with the corresponding proportion falling from approximately 60 per cent to around 20 per cent. This reflects the significant contribution of nuclear energy to the country's electricity generation mix.

These developments contrast with the 2021-22 energy crisis, when electricity prices closely followed movements in natural gas prices.

During the first half of 2026, the latest energy shock had a smaller effect on electricity prices in countries with larger shares of renewable and nuclear generation.

The ECB's assessment is that Europe remains exposed to developments in international energy markets but has become considerably less vulnerable to fossil fuel price fluctuations than it was in previous decades.

Government spending provides additional economic support

Another important source of resilience has been the increased role of the public sector in the euro area economy since the pandemic.

Government activity and public expenditure have helped support economic demand, particularly at a time when higher energy costs and geopolitical uncertainty have threatened household purchasing power and business confidence.

The ECB points out that non-market services have consistently expanded above their long-term average in recent years and have grown faster than other sectors.

Fiscal policy has also become more supportive.

Projections published in December 2025 anticipated that the euro area's fiscal stance would provide an expansionary contribution equivalent to 0.25 percentage points in 2026.

However, subsequent developments have doubled that expected support to 0.5 percentage points.

The increase has mainly been driven by higher defence and infrastructure expenditure in Germany, alongside measures introduced by other euro area governments to cushion the effects of elevated energy costs.

Germany's increased spending has therefore become an important contributor to economic activity across the wider currency bloc.

However, the ECB cautions that the contribution of government expenditure should not be considered a permanent source of protection.

Some of the measures are temporary, while several euro area countries have limited fiscal room to expand their spending further.

Current projections also indicate that government support could decline in the coming years.

This raises questions about the ability of fiscal policy to protect businesses and households against another major economic shock if government finances become increasingly constrained.

Artificial intelligence and international trade support growth

Beyond energy efficiency and government spending, the ECB identifies several additional factors that have helped sustain economic activity during the latest period of uncertainty.

These include easing geopolitical uncertainty, stronger international trade, investment associated with artificial intelligence and a relatively resilient labour market.

Uncertainty increased sharply at the beginning of the Middle East conflict, as businesses became concerned about possible shortages of energy and other essential commodities, including fertilisers.

Global supply chain pressures also deteriorated, raising fears that the disruption could spread beyond the energy sector.

However, some of these concerns began to ease in May.

Business production expectations returned to pre-war levels during August and September as the most severe anticipated scenarios failed to materialise.

Some companies may also have accelerated orders and production in anticipation of potential shortages and further cost increases, helping sustain economic activity.

International trade has provided another important source of support.

The ECB's December 2025 projections had anticipated global trade growth of approximately 2 per cent in 2026. The latest estimates have raised that figure to 4.7 per cent, more than twice the original forecast.

The increase has been particularly beneficial to the euro area because of its exposure to international demand for technology-related equipment and specialised manufactured products.

The global artificial intelligence investment boom has played a significant role in this development.

Demand for equipment, advanced technology products and specialised industrial components has benefited European manufacturers, while AI-related investment has also supported domestic business activity.

Manufacturing industries connected to artificial intelligence have performed better than the wider economy in terms of output, employment and new orders.

The improvement has also been reflected in business surveys, which indicate a relatively rapid recovery in production and new orders towards levels recorded before the outbreak of the conflict.

In the services sector, software companies have recorded stronger output performance, although employment and new orders have not experienced the same degree of improvement.

The ECB nevertheless identifies a potential vulnerability in the growing concentration of economic activity around AI-related investment.

If the global investment boom were to reverse or lose momentum, industries and companies that have benefited disproportionately from technology demand could become particularly exposed.

The central bank therefore recognises AI as an important potential source of productivity and economic growth while warning against excessive dependence on the continuation of current investment trends.

Resilient labour market supports household consumption

The euro area's labour market has also helped the economy withstand the latest energy shock.

Employment expectations initially declined following the outbreak of the conflict, reflecting concerns about higher operating costs, supply disruptions and the possibility of weaker economic activity.

However, expectations recovered relatively quickly.

Employment has continued to increase steadily since 2022, growing faster than its long-term average despite the succession of economic disruptions.

This represents an important difference from previous energy crises, which frequently resulted in weaker labour demand and rising unemployment.

The ECB argues that sustained employment growth has helped protect household incomes and consumption, limiting the extent to which higher energy costs have translated into a broader deterioration in economic activity.

A relatively strong labour market also provides businesses with a more stable domestic demand environment during periods of international uncertainty.

Together with public expenditure and investment in technology, employment growth has helped prevent the latest energy shock from producing a more pronounced economic slowdown.

ECB warns of significant risks ahead

Despite the relatively positive assessment of recent economic performance, the ECB warns that the euro area's outlook remains highly uncertain.

The central bank identifies several significant downside risks that could undermine growth and test the economy's improved resilience.

These include further escalation of geopolitical conflicts, renewed disruption to international energy supply chains, deteriorating financial market sentiment, another increase in trade tensions and the possibility of extreme weather events.

Importantly, the risks are interconnected and could emerge rapidly, potentially reinforcing one another.

For example, a further deterioration in geopolitical conditions could disrupt energy supplies, increase commodity prices, weaken business confidence and place additional pressure on financial markets.

At the same time, the factors that have supported the economy during the latest shock cannot be assumed to continue at their current levels.

Strong global demand, investment linked to artificial intelligence and expansionary fiscal policy may all weaken in the coming years.

The ECB therefore argues that the euro area must move beyond simply absorbing individual economic shocks and strengthen its ability to adapt to a changing international environment.

This requires structural improvements in energy, technology and the allocation of financial resources.

Green transition remains central to Europe's economic security

Reducing dependence on imported fossil fuels is identified as one of the most important priorities for strengthening the euro area's long-term resilience.

Further progress in the green transition would reduce Europe's exposure to geopolitical disruptions and fluctuations in international energy prices.

At the same time, the transition would contribute to reducing greenhouse gas emissions, limiting the intensification of climate change and lowering the risks associated with extreme weather events.

The ECB also stresses the importance of improving the integration of electricity markets across the European Union.

Greater cross-border interconnection, alongside investment in electricity transmission and distribution networks, would allow cheaper renewable electricity to move more efficiently between countries and reach areas where it is most needed.

Such improvements would reduce the extent to which natural gas prices influence wholesale electricity costs across the European market.

The development of interconnected electricity infrastructure is therefore viewed not only as an environmental priority but also as an essential element of Europe's economic and energy security.

AI adoption and investment needed to improve productivity

Technological innovation represents the second major area in which the euro area could strengthen its ability to withstand future shocks.

The ECB identifies artificial intelligence as a potentially important source of higher productivity and long-term economic growth.

However, the ultimate economic benefits will depend on how quickly the technology is adopted and integrated across businesses and different sectors of the economy.

Investment in AI equipment and software alone will not necessarily guarantee sustained productivity improvements.

The technology must be incorporated into business processes, production systems and services on a sufficiently broad scale to generate lasting economic benefits.

The ECB's analysis therefore places considerable importance on the diffusion of technological innovation throughout the European economy.

A broader adoption of AI could help European companies improve efficiency, strengthen competitiveness and generate additional economic value.

However, the central bank acknowledges that the scale and durability of these benefits remain uncertain.

Better allocation of savings needed to finance Europe's transition

The third priority concerns the allocation of capital and the ability of European financial markets to direct savings towards productive investment.

The energy and digital transitions are expected to generate substantial financing requirements over the coming years.

Meeting these needs will require more effective mobilisation of available savings and their allocation towards businesses, infrastructure and technologies capable of supporting long-term growth.

The ECB argues that faster progress towards a deeper European savings and investments union could help address this challenge.

A more integrated financial system would make it easier to channel capital towards productive opportunities across the European Union, supporting investment in renewable energy, digital infrastructure and technological innovation.

Improving the allocation of financial resources would also strengthen the euro area's ability to respond to future disruptions while improving its longer-term growth prospects.

Structural resilience will determine Europe's ability to withstand future crises

The ECB's overall assessment is that the euro area has become more resilient because of significant changes in its economic structure.

Reduced dependence on fossil fuels, improved energy efficiency, the expansion of renewable and nuclear electricity generation, stronger employment and a more diversified economic base have all helped limit the impact of recent shocks.

Government expenditure, stronger international trade and the global AI investment boom have provided additional support.

However, the central bank makes an important distinction between the structural improvements that can provide lasting protection and the temporary factors that have helped support growth during the current period.

The latter include unusually strong AI-related investment, favourable international demand and additional government spending, all of which could diminish.

Europe's future economic resilience will consequently depend on its ability to continue reducing energy vulnerabilities, accelerate technological innovation, integrate its electricity and financial markets and direct capital towards productive investment.

While the latest developments demonstrate that the euro area is better equipped to absorb economic shocks than it was in previous decades, the ECB warns that maintaining this resilience will require continued reform and investment rather than reliance on favourable external conditions.

The central message is that Europe's capacity to withstand future crises will depend increasingly on the structural strength of its energy systems, industrial base, technological capabilities and financial markets.

By fLEXI tEAM