It is a pleasure to be back at the ECB Watchers Conference. If this event had been held a few weeks ago, my speech would have been very different. The euro area economy ended the year with solid growth momentum. Inflation stood at 1.9% in February. And domestic growth engines looked to be strengthening, particularly private consumption, investment in digitalisation and defence spending. In all likelihood, we would have revised up our March forecasts for growth and revised them down for inflation. But we find ourselves yet again in a different world, whose contours are not yet clear. We are facing profound uncertainty about the path of the economy. None of us can resolve the uncertainty about how the war in Iran will play out. But what I can do is set out how we will approach this shock. The main message I want to convey is that our response will be rooted in our monetary policy strategy, which is well equipped to help us navigate it. Our strategy sets out three principles that will guide us. First, it requires us to assess the nature, size and persistence of the shock before taking decisions on policy.

The global economy is navigating turbulent waters. Competing forces affecting economic growth are intersecting in a complex and uncertain environment. Global growth has been supported by rising investments related to artificial intelligence and fiscal policy across major economies. At the same time, geopolitical and trade tensions are a headwind and a major source of risks. The adverse effects on the global economy from the war in the Middle East primarily stem from the sharp increase in energy prices. Together with tighter financial conditions and heightened uncertainty, the war is having a negative impact on global growth, while posing upside risks to inflation. Other geopolitical tensions, in particular Russia’s unjustified war against Ukraine, remain a major source of uncertainty. Protectionist policies are also weighing on global trade and fuelling uncertainty, while triggering a reconfiguration of global trade flows. Additional frictions in international trade could disrupt supply chains, reduce exports and weaken consumption and investment. A predictable and open international economic order remains essential to sustain global trade, investment and shared prosperity. For the euro area, the medium-term implications of the Middle East war will depend on the intensity and duration of the conflict, as well as on how the associated shocks propagate through the economy. Reducing the share of the EU’s energy that is imported and accelerating the energy transition are essential to increase energy security, competitiveness and sustainability. The euro area economy entered this period of heightened uncertainty from a relatively solid position. Economic activity expanded by 1.4% in 2025, supported by rising real incomes, low unemployment and solid domestic demand. Construction and housing renovation strengthened, and firms increased their investment, particularly in digital technologies. Net exports began to stabilise towards the end of the year, despite the challenging global environment marked by volatile global trade policies. The latest ECB staff projections incorporate this heightened uncertainty and include alternative scenarios alongside the baseline. The baseline foresees real GDP growth of 0.9% this year, rising to 1.3% in 2027 and 1.4% in 2028. These projections rely on technical assumptions that envisaged a relatively contained conflict. At the same time, low unemployment, solid private sector balance sheets and higher spending on defence and infrastructure should continue to underpin growth. Under an adverse scenario, which assumes that energy supply disruptions persist until the third quarter of 2026, with a rapid adjustment afterwards, real GDP growth would be lower in 2026, before gradually converging to the baseline path thereafter. Under a severe scenario, which assumes a more intense and prolonged disruption continuing until late 2026, growth would be significantly reduced this year and next. Risks to the growth outlook are tilted to the downside, especially in the near term. The war in the Middle East is a downside risk to the euro area economy, adding to the volatile global policy environment....