On Tuesday, MEPs gave their final approval to two pieces of legislation implementing EU tariff commitments under the August 2025 EU-US joint statement.

Sunset clause: tariff preferences set to expire on 31 December 2029, unless renewed

Clear conditions set on tariff reductions on steel and aluminium derivatives

Safeguard mechanism to protect EU industry and agricultural sector

Sunset clause
The main regulation on industrial and agri-food imports will expire on 31 December 2029. By 30 June 2029, the Commission will make a comprehensive assessment of its trade effects on EU industry, agriculture and small and medium-sized enterprises, and of changes in trade patterns with third countries, accompanied by a legislative proposal to prolong the regulation’s duration, if appropriate.
Steel and aluminium derivatives
In August 2025, the US added 407 product categories to the list of derivative steel and aluminium products subject to tariffs. Parliament considered that these new tariffs increased the level of trade instability and pushed for this issue to be addressed in the main regulation. As a consequence of this, the Commission will now be able to suspend tariff preferences if by 31 December 2026 the US continues to apply a tariff rate higher than 15% on EU steel and aluminium derivatives. The Commission will report to the European Parliament and to the Council, by 1 December 2026, on the tariff treatment of steel and aluminium derivatives.
Strengthened suspension clause
The Commission will also be able to suspend tariff preferences if the United States fails to address the EU’s concerns regarding the tariff treatment of Union exports which until 24 February 2026 benefitted from the 15% all-inclusive tariff ceiling.
Safeguard mechanism
Parliament and Council also agreed to establish a safeguard mechanism should tariff preferences granted to the US lead to increases in imports that threaten to cause serious injury to EU industry, including the agricultural sector. The Commission will be able to start an investigation on its own initiative, or on the basis of information provided by one or more member states or by the European Parliament. The Commission will also report to the Parliament and the Council on a quarterly basis on changes in trade volumes and values of US exports of the goods covered by this legislation.
Quote
Bernd Lange (S&D, DE), International Trade Committee Chair and standing rapporteur for the US, said: “Despite the pressure, Parliament stood its ground throughout these negotiations. Our determination has paid off, delivering a stronger agreement for European businesses and citizens and far more robust guardrails than originally envisaged.”
“By translating the EU’s commitments in the joint statement into law, this regulation becomes part of the EU’s defensive toolbox: it not only strengthens and stabilises EU-US trade relations, but it also gives the EU the ability to respond if the United States fails to uphold its side of the bargain. Thanks to Parliament’s firm stance, the final text now contains a far stronger safety net, including a robust suspension clause, a sunset clause, a safeguard clause, enhanced review mechanisms and stronger democratic oversight.”
“Having the right tools are only half of the job. Political will is also needed. We will continue to closely watch the implementation of this agreement. If the US side breaches either the letter or the spirit of the Turnberry agreement, Parliament will insist that the Commission makes full and timely use of every instrument provided by this regulation and the wider EU toolkit. A stable and prosperous transatlantic partnership can only succeed if both sides remain committed to it.”
Next steps
Once approved by the Parliament, it will be the Council’s turn to formally approve the agreed texts. The new legislation will then enter into force on the day after its publication in the EU’s Official Journal.
Background
On 27 July 2025, in Turnberry, Scotland, US President Donald Trump and European Commission President Ursula von der Leyen reached a deal on tariff and trade issues, outlined in a joint statement. On 28 August 2025, the Commission published two legislative proposals aimed at implementing the tariff-related aspects of the statement.
 
 
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The Council today adopted conclusions on Global Gateway, reaffirming it as the European Union’s worldwide investment strategy for building mutually beneficial partnerships and mobilising public and private resources to bridge the global investment gap. In a geopolitical environment marked by growing fragmentation, economic competition and pressure on democratic governance, the Council reiterates its commitment to advance Global Gateway as a core element of the EU’s external action. The strategy represents the EU’s positive and comprehensive offer to partner countries, combining development cooperation, trade and investment policy.
The Council reaffirmed its role in setting the political direction for Global Gateway, and underlined the need for enhanced involvement of member states and the private sector, improved governance and more effective delivery of the strategy. It also stressed the need for clearer and more transparent project selection, regular reporting, stronger coordination between the Commission, member states and EU delegations, and enhanced monitoring of results and impact.
The conclusions stress that Global Gateway is grounded in European values and high standards, including transparency, good governance, environmental and social sustainability, and respect for human rights and the rule of law. Global Gateway remains fully aligned with global commitments including the 2030 Agenda and its Sustainable Development Goals (SDGs) and the Paris Agreement. Through a Team Europe approach bringing together the EU institutions, member states, financial institutions and the private sector, the strategy aims to deliver high-quality, trusted and secure investments in areas such as digital connectivity, energy, transport, health, education and research. The Council also underlined that Global Gateway supports both partner-country priorities and the EU’s strategic interests, contributing to resilience, competitiveness, economic security, strategic autonomy and more diversified supply chains.
The Council highlights that Global Gateway goes beyond infrastructure investment alone. The strategy combines financing for transformative projects with support for enabling regulatory frameworks, skills development, institutional strengthening and policy cooperation in order to maximise long-term development impact and sustainability. The conclusions also reaffirm the importance of local ownership and equal partnerships, stressing that Global Gateway projects should be aligned with partner countries’ priorities and developed in close consultation with local authorities, civil society and the private sector.
The conclusions also emphasise the importance of increasing the participation of European businesses, including SMEs, and improving communication efforts to strengthen Global Gateway’s visibility and recognition as a trusted EU brand worldwide. The Council calls for continued dialogue with partner countries and stakeholders to ensure that the strategy continues to evolve in line with global challenges and opportunities.
 
 
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The conflict in the Middle East is expected to slow global growth to the lowest rate since the onset of the COVID-19 pandemic amid higher energy prices, steeper inflation, and increased borrowing costs , according to the World Bank Group’s latest Global Economic Prospects report. 
Global growth is forecast to slow to 2.5% in 2026, down from 2.9% in 2025. Forecasts for two-thirds of economies have been downgraded relative to January of this year.  Global growth is expected to improve to 2.8% in 2027 but will remain 0.4 percentage point below the average during the 2010s. Weak growth in developing economies has stalled progress toward advanced-economy income levels. By 2028, developing economies other than China and India will have collectively experienced nearly a decade of no progress on narrowing their per capita income gap with advanced economies, the report finds.
“Developing countries have faced a series of challenges over the last decade,” said Ajay Banga, President of the World Bank Group. “The impact differs by country, but the basic test is the same: protect people and preserve stability today, without giving up on growth and jobs tomorrow. In response to the current shock, we are providing liquidity where it is needed now — and we are ready with additional financing, guarantees, and private-sector solutions if pressures deepen. Our job is to help countries steady the ship, keep reforms moving, and emerge stronger on the other side.”
According to the report, the closure of the Strait of Hormuz has severely disrupted energy markets, with Brent crude oil prices projected to average $94 a barrel in 2026, 36% above 2025 levels, assuming the worst disruptions abate in July. Fertilizer prices are forecast to increase significantly this year, with knock-on effects for food prices. Together, these pressures are pushing up global inflation, which is expected to rise to 4.0% this year, up substantially from 3.3% in 2025. 
Yet downside risks are significant. If energy supply disruptions prove more severe than currently assumed and are accompanied by substantial financial stress, global growth could fall to just 1.3% in 2026, and inflation would rise to 4.4%.
This year, growth in developing economies is expected to drop to a post-pandemic low of 3.6%, down from 4.4% in 2025, before recovering to 4.2% in 2027. Economies in the Gulf that are directly affected by the conflict are expected to take the biggest hit as their growth tumbles from 3.9% in 2025 to close to zero in 2026. The report predicts growth will rebound in these economies—to about 5% in 2027–28—as trade recovers and spending on reconstruction begins.
The World Bank Group is committed to supporting all developing countries as they confront crises. In response to the conflict in the Middle East, it is immediately making up to $50–60 billion available through existing instruments, including $25 billion of pre-arranged financing. This can support social safety nets for the most vulnerable people, boost fiscal capacity, and provide working capital and liquidity support for firms and farms. To date, over 30 countries are actively working with the World Bank Group to enhance readiness and enable a rapid response to the crisis under this response plan. If the conflict and its economic fallout persist, the World Bank Group can scale up its support to $80–100 billion over 15 months. 
South Asia is expected to see the strongest growth of any region in 2026, but even its growth will register a significant slowdown—from 7% in 2025 to 6.3% in 2026, the report finds. Sub-Saharan Africa’s growth is also slowing, with the biggest pressures coming through inflation, including high food prices due to the fertilizer supply shortages and price hikes.
“The conflict has taken a toll on global activity, but every crisis also brings an opportunity,” said Ayhan Kose, the World Bank Group’s Deputy Chief Economist and Director of the Prospects Group. “This moment should be used to strengthen policy frameworks, invest in infrastructure, accelerate business-enabling reforms, and mobilize private capital to support job creation at scale.”
The report’s special-focus chapters examine fiscal challenges in developing economies. About two-thirds of developing economies—and nearly 90% of low-income countries—are commodity exporters. Yet these economies tend to have weaker fiscal positions than other developing economies, as they face more volatile and less diversified revenues. Five years after a positive commodity price shock, much of the revenue windfall is spent, rather than saved to strengthen fiscal positions. To manage commodity price volatility, policy makers should rely on frameworks, such as well-designed fiscal rules and sovereign wealth funds with clear stabilization mandates, alongside improved domestic revenue mobilization and greater economic diversification.
The other chapter explores how rising debt levels are making it harder for countries to respond to crises and invest in long-term development priorities—and driving up borrowing costs in the process. Since 2010, aggregate government debt in developing economies has climbed from under 40% of GDP to over 70%. The analysis finds that the more indebted a country already is, the more sharply its borrowing costs rise with additional debt. The effect is particularly acute in more vulnerable countries. For countries with elevated debt-to-GDP ratios, reducing debt levels can yield meaningful financial rewards: greater fiscal space to invest in infrastructure, health, and education, fueling economic growth and job creation. 
Download the full report: https://www.worldbank.org/gep
 
 
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The Council today agreed its position on strengthening the carbon border adjustment mechanism (CBAM), the EU’s tool to fight carbon leakage and promote global decarbonisation, ahead of negotiations with the European Parliament. The new framework would extend the CBAM’s scope to new products and close loopholes that may be used to circumvent the system
” The EU remains committed to reducing climate emissions both within the Union and globally. Strengthening the CBAM and closing loopholes that can circumvent our rules is a key part in fulfilling that goal. The position agreed today is the first step in making the system more robust.” – Makis Keravnos, Minister of Finance of the Republic of Cyprus
In operation since 1 January 2026, the CBAM puts a price on carbon emitted during production of imported goods in the most carbon-intensive sectors: iron and steel, cement, fertilisers, aluminium, electricity and hydrogen, and encourages cleaner industrial production in non-EU countries.
Extending CBAM’s scope
In its current form, CBAM targets almost only raw materials. This creates a risk that EU-made products using a significant proportion of CBAM goods in their manufacture, in particular iron, steel and aluminium, could contribute to an increase of emissions outside the EU and replace similar EU products that are subject to the emissions trading scheme.
To prevent this, the updated legislation extends CBAM’s scope to a selection of such downstream products. In its agreed position, the Council has refined the list of new products to which the CBAM would be applied and mandates the Commission to conduct an annual review on future downstream products that could be included.
In terms of anti-circumvention, the Council’ largely agrees with the Commission’s original proposal which introduces new measures bringing pre-consumer metal scrap into CBAM’s scope and empowering the Commission to act when deceptive practices are detected during reporting by high-risk companies.
Serious and unforeseen circumstances
To deal with serious and unforeseen circumstances causing severe harm to the internal market, the Commission’s proposal laid out a process to temporarily exempt goods from the CBAM framework.
The Council position defines more precisely the mechanism to be followed in this regard and makes clearer the boundaries of the Commission’s exemption empowerment. It also insists that any such exemption should be based on clear and objective criteria, including EU exposure to severe price increases.
Next steps
Negotiations between the Council presidency and the European Parliament are expected to start as soon as possible after the Parliament adopts its own position, and with a view to finding an agreement before the end of the year.
Background
EU industrial producers must offset their CO2 emissions with allowances from the EU Emissions Trading System (ETS). But for production outside of the EU, the ETS does not apply. As a result, carbon-intense EU production could increase in countries with less strict climate policy. This is called carbon leakage.
CBAM is the EU’s tool to counter this phenomenon. The CBAM regulation was formally adopted by the Council in April 2023 and became fully operational on 1 January 2026. It puts a fair price on carbon emitted during production of imported carbon-intensive goods in key sectors – iron and steel, cement, fertilisers, aluminium, electricity and hydrogen – and encourages cleaner industrial production in non-EU countries.
In September 2025, the Council adopted a set of changes to simplify CBAM further and cut red tape, as part of the Omnibus I legislative package. The regulation entered into force on 1 January 2026.
 
 
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How new economics tools explain global power dynamics

Throughout history, powerful nations have used economic leverage to bend others to their will. Florence’s Medici banking dynasty shaped Renaissance politics with its financial dominance, and imperial Britain used trade dominance to bind its empire together and wield power across the globe. Today, the United States freezes access to financial markets or urges its allies to impose export controls on essential technologies, and China threatens restrictions on rare earths to expand its influence. These are examples of geoeconomics, or the use of financial and trade relationships to achieve geopolitical and economic goals.
With the recent surge in great-power competition and increasing use of tariffs, sanctions, and export controls, understanding geoeconomics has become essential for policymakers navigating an increasingly volatile world. The use of geoeconomic power can increase cooperation and prosperity, but it can also cause fragmentation and disintegration. It is important to understand both its potential and its drawbacks.
The academic study of geoeconomics dates most prominently to 1945, when economist Albert Hirschman published National Power and the Structure of Foreign Trade. In it, he examines how Nazi Germany had structured its economy to maximize leverage over its neighbors during the interwar period. He rejected the naive view that because trade is voluntary and mutually beneficial, it is geopolitically harmless. Benefits can be mutual, Hirschman argues, without being symmetrical. And asymmetry is how power builds.
Since Hirschman’s time, economists have left the study of global power dynamics largely to political scientists and historians, who have led the development of this area of research. Though almost every economics student encounters the Herfindahl-Hirschman Index, few know it was invented to measure the economic power of nations, not firms. Perhaps there was a sense that the postwar world order made such concerns obsolete.
Now, in the wake of increasing competition between great powers, geoeconomics has become impossible to ignore, and economists have new tools at their disposal, including network analysis and modern macro, trade, and game theory. Our own research agenda aims to provide an economic modeling framework for geoeconomics. The goal is not only theoretical clarity on the sources and channels of power but also the ability to bring models to the data and discipline policy counterfactuals.
Geoeconomic power
How do countries build geoeconomic power? Suppose Country A supplies intermediate goods to Country B. It could threaten to withhold those goods if Country B does not comply with its demand. If the intermediate goods are sufficiently important, and if it is sufficiently difficult to source them elsewhere, such that Country B would be better off acquiescing to Country A’s demand than dealing with the realization of its threat, then Country B would comply.
Threats to withhold only one input can work; however, threats are more powerful when the imposing country controls multiple economic relationships. A country that controls many related inputs, such as intermediate goods and foreign capital, exerts greater power, because it can inflict greater losses on the target country. That is why countries such as the United States and China are often referred to as hegemons. A hegemon uses these joint threats to exert power over firms and governments in its network and ask them to take costly actions. These actions can take the form of monetary transfers, changes in markups on prices, and surcharges on loans but also policy actions such as trade restrictions (for example, tariffs and quotas) or political concessions.
Consider how China has structured its Belt and Road Initiative. Beijing provides developing economies with package deals that combine loans, infrastructure projects, and access to manufactured goods. If a borrowing country defaults, it risks losing all these relationships simultaneously. This bundling increases China’s geoeconomic power. In exchange, Beijing might demand political concessions, such as closer alignment over key geopolitical issues.
Adding to the power of hegemons is their ability to sway countries outside their network, reshaping the world equilibrium to consolidate more power. For example, when the United States put pressure on European governments and firms to stop using Huawei’s 5G technology, so-called network effects amplified the impact. Because the value of a telecommunications network increases the more widely it is adopted, getting some countries to reject Huawei made the technology less attractive for others, including countries the US could not directly pressure.
Choke points and dependencies
Inputs are called choke points, or critical dependencies, if the hegemon controls a dominant market share of the input in the targeted economy and it is difficult to find alternatives to the hegemon’s inputs. For example, the US and its allies control an overwhelming share of global financial services, upward of 80 to 90 percent in many countries. Payment systems, settlement infrastructure, and dollar-denominated lending are basic inputs in a functioning economy. The lack of viable alternatives to the US financial infrastructure gives the country considerable geoeconomic power. Recently, it has wielded this power by imposing comprehensive financial sanctions on Iran and Russia, putting pressure on HSBC to disclose transactions linked to Huawei, and cutting Russian banks’ access to the SWIFT messaging system for international financial transactions.
However, there is a catch. The relationship between control over a sector and geoeconomic power is not linear; rather, power increases disproportionately as a hegemon approaches complete control. The difference between controlling 95 percent and 85 percent of an input is disproportionately large. At 95 percent, a target economy has almost no viable alternatives and must accept whatever terms the hegemon demands. At 85 percent, there is enough of an alternative to give the target meaningful options, and the hegemon’s leverage dissipates rapidly.
US policymakers often take comfort in the fact that the dollar remains dominant and Chinese alternatives to the Western financial system remain marginal. By standard metrics, China accounts for a small fraction of global financial services. The argument goes that even if China provided 10 percent of world basic financial services, that would pale in comparison to US dominance.
This reasoning is correct about market shares but wrong about power. There is a difference between macroeconomic relevance and geoeconomic relevance. For a medium-sized economy, the existence of an alternative provider with even a 10 percent market share is enough to withstand much of the coercion that a dominant power can exert. A disproportionate part of the losses to US power would come from a Chinese alternative going from 1 percent to 10 percent, with further Chinese market gains causing progressively less power dilution for the US.
Russia’s preparation for Western sanctions illustrates this dynamic. After its invasion of Crimea in 2014, Russia moved to reduce its dependence on the US-led coalition, further developing its domestic payment system and connecting to China-based systems. Consequently, the US-led coalition’s financial power over Russia greatly diminished. This preparation helps explain the somewhat muted effect of the sweeping financial sanctions imposed after 2022: Russia had already built enough of an alternative to blunt the weapon’s edge.
China and India are following Russia’s example and building alternative payment and settlement systems. Granted, these are unlikely to replace the dollar-centric architecture. However, the question is not whether an alternative system can rival the dollar across all its uses, but whether it can be viable enough to significantly diminish US influence at the margin. Emerging markets aren’t alone. Euro area countries are pushing forward a digital currency in the hope of gaining greater monetary sovereignty and reducing dependence on the US financial infrastructure.

In the wake of increasing competition between great powers, geoeconomics has become impossible to ignore, and economists have new tools at their disposal.

Risks of fragmentation
Our work shows that there is a trade-off between gains from trade and economic security. The same mechanisms that are the classic foundations of the gains from trade—economies of scale and specialization—also generate economic dependence. The domestic alternatives that countries did not build up are poor substitutes for globally dominant inputs, such as Chinese manufacturing or US financial services and technology. This lack of alternatives leaves the countries exposed to coercion. As the global economy increasingly relies on goods and services that have strategic complementarities and economies of scale, these mechanisms are likely to increase in importance. This applies to payment systems, but also to information technology and artificial intelligence.
As geoeconomic power has risen to the forefront of international relations, hegemons want to hyperglobalize the system to increase everyone else’s dependence on what they control, while countries that are heavily dependent on hegemons have begun pursuing anti-coercion policies to reduce their vulnerability to pressure. The Chinese alternative financial architecture is one example; another is the European Commission’s European Economic Security Strategy, explicitly aimed at countering the weaponization of economic dependencies.
These policies might be individually optimal, and, as demonstrated by the nonlinearity of choke point sectors, are likely to be successful for the countries implementing them appropriately. However, taken together, they can lead to a troubling collective dynamic. When one country reduces its reliance on the global system, the system itself becomes less attractive to others, because its value often depends on the number and size of its participants. This shifts the calculus for other countries in favor of decoupling as well, triggering further exits. The result is excessive fragmentation, a world where the gains from trade and financial integration degrade to a degree that leaves everyone, including the hegemon, worse off.
This dynamic leads to a somewhat surprising conclusion: Hegemonic powers can increase their own welfare by voluntarily and credibly constraining their use of coercion. A hegemon that commits to limiting its demands (for example, by submitting to the rules of international organizations) can dissuade other countries from pursuing costly anti-coercion policies. The hegemon gives up some of its flexibility to coerce, but in return it preserves the size and attractiveness of its economic network, which is the source of its power.
Viewed this way, the postwar liberal order, composed of institutions like the IMF, World Bank, and World Trade Organization, can be understood not as the opposite of hegemonic power but as one of its most sophisticated expressions. These institutions serve as commitment devices: By credibly promising not to exploit dominant positions too aggressively, the US and other hegemons keep other nations within the same economic system. As these rules-based constraints weaken, if hegemons are perceived as willing to exert their geoeconomic power unpredictably or erode their institutional commitments, other countries rationally respond by developing their own economic security policies and accelerate disintegration from the hegemons’ networks.
Measurement challenges
While theoretical clarity is a necessary foundation, it must lead to testable implications and empirical guidance for policy. As world policymakers confront geoeconomic uncertainty, they must provide guidance driven by facts and data interpreted through the lens of models. There are at least two promising ways to bring existing theory to the data. The first uses advances in trade modeling and bilateral trade data to estimate how much a targeted country would suffer from losing access to hegemon-controlled inputs, measuring the quantitative importance of threats. Most threats are not powerful, and most industries are not strategic, either because the hegemon does not sufficiently control them or because it is easy for the target to find good substitutes. The same logic can be applied to capital flows, in addition to goods trade.
An obvious problem with measurement is that the most powerful geoeconomic threats will not materialize if targets comply. Recent advances in artificial intelligence point to a possible solution. Large language models (LLMs) can be used to analyze the text of analyst reports and earnings calls regarding the multinational corporations that dominate world trade and finance. This approach addresses part of the measurement issue because analysts and company executives discuss geoeconomic actions that have been threatened but not yet taken. It can also measure threats in quite granular detail. The demands of the hegemon might span multiple domains that are hard to specify in advance: Do not buy this, do not sell that, or give me a political concession.
In our work, we show that LLMs can extract signals about geoeconomic pressure down to a specific firm, instrument, and reaction. This can be done in near real time, enhancing the value for policymakers. More specifically, in this paper we applied LLMs to firm earnings calls and analyst reports to see how firms respond to tariffs, sanctions, and export controls. And our results were striking: Geoeconomic pressure indeed acts as a potent force that measurably affects firm’s decisions regarding pricing, investment, and supply chains. Chinese firms responded to US export controls on semiconductors by increasing domestic research and development. Western firms largely reported complying with US demands to lower sales to China of specific technologies. US firms report being overall negatively affected by US tariffs and intending to raise sales prices while facing higher input prices.
A path through the storm
In the short term, the world is unlikely to return to the era of globalization that preceded the heightened US-China rivalry. Geoeconomic competition is a defining feature of the current moment and almost certainly of the years ahead. However, the economics also offers a hopeful message. Through strategic and optimally targeted policy, it’s possible to avoid total fragmentation.
For countries pursuing anti-coercion policies, targeted diversification in key sectors controlled by the hegemons can dramatically reduce a country’s vulnerability without requiring wholesale decoupling. The policy challenge is to identify the true choke points—sectors where dependence is greatest and alternatives are scarcest—and concentrate diversification efforts there while preserving the broader benefits of integration.
For hegemons, maintaining power in a global environment that fears geoeconomic pressure will involve committing to limited use of power in the interest of encouraging smaller countries to remain in a system that benefits everyone. The most effective hegemonic strategy is one that maintains credible commitments to rules-based behavior, keeps the global system attractive to participants, and reserves coercive instruments for clear and limited purposes. This approach increases confidence in the hegemon’s commitment to global cooperation and minimizes defensive responses that ultimately diminish the hegemon’s power.
Geoeconomic competition will shape the next decades of international relations. Countries that understand the nonlinearity of power, the value of targeted diversification, and the principle of self-restraint will navigate this period more successfully than those that do not. The world does not need to fragment completely to give countries economic security, and hegemons do not need to abandon their leverage entirely to preserve it. It is a difficult balance to strike, but the alternative, a fractured global economy where everyone ends up poorer and less secure, makes the effort worthwhile.

 
 
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Blog | The current energy shock is significant and global, but it is also hitting a euro area economy that is more balanced than when Russia invaded Ukraine in early 2022. History and analysis show that context matters a lot for how shocks propagate to inflation.
Energy prices have risen sharply since early 2026 when war broke out again in the Middle East and the Strait of Hormuz was closed. This big uptick in energy inflation has in turn driven up headline inflation in the euro area, to stand at 3.2% in May.
This blog post takes a close look at two dimensions that are relevant for the propagation of an energy shock: (i) the nature and composition of the shock itself, and (ii) the state of the economy and the broader macro-financial condition at the outset.
This shock is different
The current energy shock differs in nature and composition from the episode that followed Russia’s invasion of Ukraine in February 2022. Unlike in 2022, the Middle East war has sparked more disruption in the supply of oil, rather than of natural gas, to the euro area. Indeed, the upsurge in crude oil prices has been faster and pressure on prices of some refined oil products, like diesel, has been larger in the latest episode than in 2022, while wholesale gas and electricity prices rose much more in 2022 (Chart 1). The difference in the reaction of gas and electricity prices for the most part reflects how Europe was more directly exposed to the shock in 2022 and was less prepared.
Chart 1
Developments in energy prices across components

(panel a: USD/Bbl, panel b: EUR/MWh, panel c: EUR/MWh)

Sources: Refinitiv andECB staff calculations.
Notes: Monthly data over the months of each year. The vertical line indicates Russia’s full-scale invasion of Ukraine and the outbreak of the war in the Middle East. The latest observations are for May 2026.

Moreover, some structural changes in the euro area energy mix since 2022 also imply that the direct sensitivity of consumer prices to a given wholesale energy price shock has declined. The clearest example of this is the increasing cushioning role of electricity generated from renewable sources. While wholesale electricity prices tracked gas prices closely during the 2021-22 energy crisis, their reaction since the start of the war in the Middle East has been far more muted.[1]
While these differences point towards a less broad-based energy shock, other factors point in the opposite direction. In particular, oil supply shocks propagate to consumer inflation faster than gas supply shocks do. Rising crude oil prices transmit rapidly to what consumers pay at the pump, and rising prices tend to pass through stronger than falling prices. By contrast, it can take several months before increases in wholesale gas and electricity prices are reflected in consumers’ utility bills.[2] Seen from another angle, the current shock is more global in nature than the 2022 episode. A global shock has larger indirect effects on inflation, as cost pressures build more broadly along global value chains. This, in turn, causes import prices to rise more sharply and the energy price shock to transmit stronger to the domestic economy.[3]
Initial economic conditions matter
Beyond the nature of the shock itself, the starting macro-financial environment plays a key role in the propagation of an energy shock into underlying inflation. The pass-through tends to be stronger when the level of the inflation rate is higher, demand conditions are more robust, the labour market is tighter and fiscal and monetary policy are more expansionary. Along each of these dimensions, today’s starting point differs substantially from early 2022.
Starting inflation environment
When Russia invaded Ukraine in February 2022, euro area headline inflation, as measured by the Harmonised Index of Consumer Prices (HICP), was growing at between 5% and 6% year on year and was accelerating (Chart 2, panel a). Energy inflation had already been climbing steeply from around 15% since mid-2021 to slightly above 30% in February 2022 due to a combination of surging post-pandemic demand and Russia curtailing gas supplies ahead of the invasion. When the current shock hit in late February 2026, headline inflation stood slightly below 2% − close to the ECB’s medium-term target − with energy and core inflation momentum at moderate levels.
The initial level of inflation when a shock hits matters a great deal. There are several reasons for this. The pass-through of energy price increases to consumer inflation can be amplified when inflation is already high. When price pressures are contained, firms tend to absorb small cost increases rather than reprice. But in a high-inflation environment, waiting too long risks eroding margins excessively. As a result, firms are more likely to increase the frequency of price adjustments, leading to more persistent inflationary pressures.[4] Starting from a position of inflation close to target thus reduces the risk of the initial energy price spike triggering a disproportionate reaction by price- and wage-setters.[5] Furthermore, households and firms may also now be paying closer attention to inflation after the recent experience of a high inflation episode. When attention is high, expectations are more sensitive to developments, potentially amplifying the inflationary impact of the shock.[6]

Chart 2
Developments in overall HICP headline

(annual percentage changes)

Source: Eurostat.
Notes: The vertical line indicates Russia’s full-scale invasion of Ukraine and the outbreak of the war in the Middle East. Core inflation stands for HICP inflation excluding energy and food. The latest observations are for May 2026.

Demand and supply conditions
When Russia invaded Ukraine, global and domestic demand was robust following the lifting of most pandemic restrictions.[7] The composite Purchasing Managers’ Index (PMI) for new orders stood firmly in expansionary territory at the start of 2022 (Chart 3, panel a). When the current shock hit, by contrast, new orders were already hovering around the no-change threshold of 50, pointing towards subdued rather than strong demand. A similar divergence is visible in cost pressures. Input prices were already elevated at the beginning of 2022, amid pandemic-related bottlenecks. In 2026, they started from a much lower base.
The European Commission’s business surveys on the factors limiting production tell a similar story.[8] In 2022, firms overwhelmingly reported shortages of material and equipment as the main binding constraint on the supply side, while insufficient demand was cited only rarely (Chart 3, panel b). In 2026, this pattern essentially reversed. This means that not only are demand-pull and cost-push inflationary forces weaker than in 2022, but the balance had tilted away from a binding supply side towards a more demand-constrained economy before the outbreak of the war in the Middle East.

Chart 3
Business survey indicators for demand and supply developments in 2026 and 2022

a) Composite PMI
(diffusion index around the no-change value of 50)

b) European Commission’s composite business survey
(balance, percentage)

Sources: S&P Global and European Commission.
Notes: The vertical bars separate the observations preceding and those following Russia’s invasion of Ukraine (2022) and the initial strikes on Iran (2026). The European Commission’s composite business survey in panel b) refers to a weighted average of the corresponding indicators for the manufacturing and services sectors. The weighting scheme follows the Commission’s official guidelines (i.e. 40% on manufacturing and 30% on services, rescaled to sum to 100%).

Labour market conditions
Labour demand has eased significantly in the last four years. Firms have reduced the number of job openings to pre-pandemic levels, with the vacancy rate falling to 2.2% in the first quarter of 2026 from its high records at the end of 2021 (Chart 4, panel a). By contrast, labour supply has improved compared with 2022, as more national workers have joined the labour force and immigration of foreign workers has risen. Also, workers are now working slightly more hours on average. The combination of declining labour demand and steadily increasing labour supply has led, in turn, to a marked decline in labour shortages reported by firms.

Chart 4
Labour market conditions

a) Job vacancy rate

b) Labour market tightness indicators

Sources: Eurostat, European Commission, ECB (CES) and ECB staff calculations.
Notes: All indicators in panel b) are scaled such that the outer circle of the radar chart corresponds to the “tightest” and the inner circle to the “least tight” outcome of each indicator. The “tightest” outcome is defined for each variable either as the lowest level recorded since Q1 2005, which applies to all variables related to unemployment, the participation rate, the ratio of active foreign to national working-age-population and average hours worked, or, otherwise, as the highest level recorded since Q1 2005. The “least tight” outcome is defined conversely to the “tightest” outcome. The job-to-job transition rate has been computed on the basis of the CES. Average hours worked and the job-to-job transition rate are smoothed as four-quarter averages.

Although job matching has improved since 2022, labour market dynamism has weakened. While the job-to-job transition rate – the share of workers changing jobs each quarter – is marginally higher than at the start of 2022, this indicator is outweighed by the broader evidence of reduced labour market tightness depicted in Chart 4, panel b. By contrast, the overall number of recent job starters is now lower than when Russia invaded Ukraine. This points to a gradual loss of momentum in the labour market over recent years, which has facilitated a sustained moderation in wage growth rates.[9]
Fiscal and monetary policy stance
The euro area headline fiscal positions looked broadly similar at the onset of each of the two energy crises, with governments expected to run deficits of 3.2% of GDP in 2022 and 3.3% in 2026.[10] However, a closer look reveals how different fiscal policy actually is today.
The euro area entered the 2022 energy crisis buoyed by large fiscal stimulus and strong monetary policy accommodation during the pandemic, which helped to sustain demand then and in the subsequent years.[11] By contrast, the fiscal and monetary policy stance was broadly neutral when the 2026 energy crisis erupted.
At the same time, room for fiscal manoeuvre is more limited today than in 2022. Stripping out cyclical and other temporary factors, the structural fiscal deficit projected for 2026 is larger, at 3.3%, than the 2.6% projected for 2022.[12] Moreover, pre-crisis government plans entailed a substantial consolidation in 2022 following the discontinuation of some pandemic-related support.[13] That freed up additional fiscal space that could be used to respond to the energy shock. In 2026, fiscal stances are already loosening in several countries, most notably in those with available fiscal space such as Germany and the Netherlands.[14] In turn, this leaves considerably less room to implement additional measures to support households and firms (Chart 5, panel a). The debt outlook is now also less favourable. Although the aggregated euro area government debt ratio was broadly comparable at the start of the two episodes, the cost of debt refinancing has increased materially. In 2022, sovereign borrowing costs were near historic lows and the interest rate-growth differential was still negative in most euro area countries. By 2026, with policy rates and term premia higher, that fiscal buffer has largely dissipated and medium-to-long-term debt projections now point to significantly more adverse dynamics (Chart 5, panel b).

Chart 5
Fiscal positions prior to 2026 and 2022 energy crises

(panel a: budget balance and structural balance: percentages of GDP, fiscal stance: percentages of potential GDP, interest rate-growth differential (i-g); percentage points; panel b: percentages of GDP)

a) Euro area budgetary indicators

b) Euro area debt outlook

Sources: Eurosystem staff macroeconomic projections for the euro area, December 2021 and December 2025, and related Debt Sustainability Analyses.
Notes: BMPE stands for Broad Macroeconomic Projection Exercise, as reflected in the Eurosystem staff macroeconomic projections for the euro area. The dashed segments in panel b) represent projected values. These replicate the BMPE figures until the end of the BMPE horizons (t+3) and are extended assuming constant structural balances net of ageing costs.

Limited fiscal space requires a more muted and targeted fiscal response to the 2026 crisis. This may, on the one hand, keep the demand-driven inflationary impact of fiscal policy contained. On the other hand, it reduces the scope for measures aimed at mitigating inflation in the near term, such as introducing price caps.
Conclusions
The current energy shock is significant. Headline inflation has moved above target. At the same time, the present episode is unfolding under conditions that are clearly different from those observed during the 2022 crisis.
Some features point towards lower inflationary risks now than they did in 2022. The shock is now predominantly an oil shock rather than a gas shock, and the increase in the share of electricity generated from renewables and nuclear provides a buffer for consumer electricity prices. Inflation was close to target when the current shock struck, and inflationary momentum was not rising. Both demand conditions and supply conditions appear less inflationary now. The labour market looks less tight overall. And the monetary-fiscal policy mix is more neutral while fiscal space is narrower, limiting the capacity that governments have to provide additional support that could stimulate demand.
That said, a number of other initial conditions flag larger inflationary risks now compared with 2022. Constrained fiscal space implies less room to cushion the impact of the energy shock on inflation in the near term. Moreover, the current shock is global, which raises the risk of strong non-linear amplification, should the shock prove larger, broader or more persistent than currently expected.Finally, the recent experience of households and firms with high inflation may shape how strongly the current energy shock feeds through to inflation, albeit with an intensity that is hard to predict.
Overall, the current energy shock is unfolding in a context that differs markedly from four years ago. This calls for close monitoring of its effects on broader inflation dynamics, with particular attention being paid to the specific macro-financial features of the euro area today.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
 
 
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Global steel excess capacity continues to grow, driven by increasing subsidies in some major non-OECD steel-producing economies, while efforts to restore fair competition are increasingly undermined by circumvention of trade measures aimed at levelling the playing field, according to a new OECD report.
The OECD Steel Outlook 2026 projects global steel excess capacity to reach 745 million tonnes by 2028, exceeding the OECD’s current steel production by 319 million tonnes. Planned capacity additions of up to 139 million tonnes through 2028 represent a 5.7% increase from 2025 levels, while demand growth is expected to remain subdued at around 0.9% per year.
Most new capacity is being added outside the OECD, often with government support. In 2024, the median Chinese steel firm received 15 times more in subsidies, relative to their total assets, than producers elsewhere, up from 10 times in 2023. Chinese steelmakers exported a record 131 million tonnes in 2025, a 153% increase from 2020 and more than the European Union’s total steel production in 2025.
“Excess steel capacity creates problems for everyone. It distorts global markets. It hurts economic security and resilience. And it discourages innovation and sustainability,” OECD Secretary-General Mathias Cormann said at the OECD Ministerial Council Meeting. “We need to tackle the root causes – including harmful subsidies and other non-market practices. That means stronger international co-operation. A level playing field for steel producers everywhere.”
The Outlook identifies trade patterns that indicate growing circumvention of trade measures, such as anti-dumping and countervailing duties on certain Chinese steel products. Exports of products like hot-rolled plates and hot-rolled wide coils from China to Southeast Asian countries have increased sharply, alongside increased exports of the same products from Southeast Asia to OECD markets.
The report further highlights a 300% increase in China’s exports of semi-finished steel to Southeast Asia in 2025. This suggests that such products may be processed in third countries before being re-exported to OECD markets, potentially bypassing current trade measures.
Click here to access interactive chart.
The report also highlights growing pressures on raw material supplies. No steel-producing country is fully self-sufficient in the inputs required by its steel industry, and export restrictions on key raw materials for steelmaking are expanding worldwide, with 42 countries now restricting scrap exports. Rising energy costs linked to the conflict in the Middle East are adding further strain, as energy can account for up to 40% of steel production costs. These pressures are weighing on investment decisions across the industry, with several lower-emissions steelmaking projects now postponed.
The OECD Steel Committee and the Global Forum on Steel Excess Capacity are advancing a co-ordinated response by developing a comprehensive framework for joint action on steel, working with 28 major steel-producing economies accounting for almost 70% of global steel imports.
 
 
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The Council today adopted a regulation establishing a new framework to protect the EU steel market from the negative trade-related effects of global overcapacity, as outlined in the Steel and Metals Action Plan of 2025. The new rules will replace the current EU steel safeguard measure, which expires on 30 June 2026, ensuring continued protection for the EU steel sector.
” Steel is indispensable to Europe’s industrial base, its green transition and its security. With today’s adoption, the EU is putting in place a stronger framework to respond to global market distortions, protect fair competition and provide greater certainty for both steel producers and downstream industries.” – Michael Damianos, Minister for Energy, Commerce and Industry of the Republic of Cyprus
The regulation introduces a revised tariff-rate quota (TRQ) system aimed at addressing the negative trade-related effects of structural global overcapacity, including a reduction in import quotas and higher duties on imports exceeding those quotas. It also provides greater flexibility for economic operators through rules allowing the carry-over of unused quotas from one quarter to the next only within the same year, while ensuring adequate supply for downstream industries and maintaining compatibility with the EU’s international trade obligations.
To improve transparency and help prevent circumvention, the regulation also introduces provisions related to the ‘melt and pour’ requirement, which identifies the country where the steel was first melted and poured into its initial solid form.
In addition, it establishes a reinforced review mechanism allowing the Commission to assess the scope and effectiveness of the measure and propose adjustments where necessary in response to market developments and evolving global overcapacity conditions.
In a joint declaration accompanying the regulation, the Council, the European Parliament and the Commission reaffirm their commitment to reducing economic dependencies on Russia, emphasising ongoing efforts to diversify steel imports, with the gradual phase-out of Russian steel products.
Next steps
The regulation will be published in the Official Journal of the EU and will start applying from 1 July 2026.
Background
Steel is an essential material for the EU economy, including for its green transition and strategically important sectors such as defence, and vital for the EU’s economic security and social stability. The EU steelmaking industry is the world’s third largest producer, directly employing around 300,000 people and sustaining regional economies across member states.
This key industry is currently facing significant pressure from unsustainable levels of global overcapacity, which is projected to grow to 721 million tonnes by 2027, more than five times the EU’s annual consumption. This overcapacity, combined with trade-restrictive measures from third countries that limit imports into their markets, has made the EU market the primary recipient of global excess steel. This has led to increasing imports, low-capacity utilisation (67% in 2024), high EU manufacturing costs, and ultimately threatens the industry’s long-term ability to invest in decarbonisation.
To address these critical challenges, including the loss of some 65 million tonnes of capacity and up to 100,000 jobs since 2007, the Commission announced its intention to prepare a new steel measure in March 2025. The proposal was then tabled in October 2025.
 
 
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