Eurozone banks tighten lending as Iran war fuels energy shock

Eurozone banks significantly tightened lending standards for companies in the first quarter of 2026 and expect further tightening ahead. The main drivers are rising geopolitical tensions surrounding Iran and increasing pressure on energy markets, Reuters reports, citing data from the European Central Bank.

Credit conditions deteriorate to lowest level in two years

ECB analysts, based on a survey of bank lending across 21 eurozone countries, found that credit conditions deteriorated markedly in the first quarter of 2026. In the corporate segment, the tightening was the sharpest since October–December 2023. Key reasons include perceived risks to the economic outlook, geopolitical instability, and developments in the energy sector. Some institutions also reported additional restrictions for firms linked to energy-intensive industries and countries in the Middle East.

Further and more widespread tightening of lending standards is expected in the coming months. At the same time, demand for loans declined slightly, contrary to banks’ expectations, as companies reduced investment activity.

Inflation expectations rise sharply in Europe

Inflation expectations in Europe also increased significantly — from 2.5% in February to 4% in March over a one-year horizon. Three-year expectations rose to 3%. Both figures are well above the ECB’s 2% target and are also linked to the war in the Middle East. Longer-term expectations remain more stable, with five-year forecasts at 2.4%, up slightly from 2.3%.

The shift in sentiment strengthens the case for higher interest rates, but financing conditions are already deteriorating even without additional ECB action. The eurozone and global economy are facing mounting pressure from an energy shock triggered by the war in Iran. Production costs are rising, while activity is weakening even in the services sector.

EU budget negotiations face new tensions

Financial pressure and growing uncertainty linked to the war in the Middle East are adding complexity to preparations for the European Union’s 2028–2034 budget. The seven-year framework sets spending priorities across key policy areas and is traditionally the subject of difficult negotiations among member states.

The European Commission has proposed a budget of nearly €2 trillion, equivalent to around 1.26% of the EU’s gross national income. The plan has already faced opposition from several net contributor countries, including Germany, the Netherlands, Sweden, Denmark and Austria, which argue against higher overall spending and call for tighter cost control.

The main dispute centres on budget allocation. Core spending areas such as agriculture and regional cohesion remain the largest items, but calls are growing for a shift toward new priorities, including defence, technology, industrial policy and competitiveness. Additional tensions stem from discussions over revising rebate mechanisms that previously reduced contributions for some member states.

Pressure on the EU economy intensifies

Analysts at International Investment note that the conflict surrounding Iran has become a key external factor simultaneously driving inflationary pressure and worsening credit conditions in the eurozone. Higher energy prices affect both household purchasing power and corporate costs, reinforcing elevated inflation expectations.

The European Central Bank faces a more constrained policy environment: efforts to contain inflation risk further cooling economic activity, while looser conditions could reinforce price pressures. Policy space is narrowing.

Additional strain is emerging within the EU, where rising defence and technology spending needs coincide with fiscal constraints in net contributor countries. External shocks and internal disagreements are increasingly reinforcing each other, making the region’s economic outlook more fragile.