FRANKFURT (Realist English). The first half of May 2026 has become a period of hesitation for the European Union’s economy.
The European Central Bank kept key interest rates unchanged, the euro exchange rate is balancing near one-and-a-half-year lows, while industry and stock markets demonstrate fragility in the face of US tariff threats and the war in the Middle East.
ECB: A Pause, But Not a Relaxation
At its meeting on April 30, the ECB Governing Council, led by Christine Lagarde, decided to keep key interest rates unchanged. The regulator took a wait-and-see stance, but its rhetoric has noticeably hardened.
The reason is the war in the Middle East, which has led to a sharp jump in energy prices, stoking inflation and weighing on economic sentiment.
“The impact of the war on medium-term inflation and economic activity will depend on the intensity and duration of the energy shock,” Lagarde said following the meeting.
Markets are already pricing in a rate hike. According to Reuters, the probability of a 25-basis-point increase at the June meeting is estimated at 92%. ECB Governing Council member Isabel Schnabel warned of rising inflation risks associated with the conflict.
Euro Loses Ground Under the Weight of Geopolitics
The euro-to-dollar exchange rate remains under pressure. According to the ECB, the official rate on May 8 was $1.1761 per euro. By the weekend, the pair had fallen to 1.1765, having earlier in the week reached 1.1787.
There are several reasons for the weakening of the single European currency. First, US President Donald Trump rejected Tehran’s new peace proposal, calling it “completely unacceptable.” The escalation pushes investors toward the dollar as a safe-haven asset.
Second, Trump threatened Europe with new tariffs if the EU fails to meet its obligations under a trade agreement by July 4. Additionally, there is a threat to increase tariffs on European cars from 15% to 25%. Finally, Europe remains critically vulnerable to disruptions in energy supplies through the Strait of Hormuz.
Industry: Fragile Stabilization
Industrial production in the eurozone rose by 0.4% in February 2026 compared to January, when a decline of 0.8% was recorded. However, the annual dynamic remains weak: according to April data, industrial production contracted by 0.6% year-on-year (compared to a forecast decline of 1.0%).
Industry shows signs of stabilization, but it is too early to speak of a confident recovery — any external shock could erase the positive trend.
Stock Markets: Hopes Dashed
European stock indices ended the week lower. The pan-European Stoxx 600 fell 0.7% to 612 points. Germany’s DAX plunged 1.3%, closing at 24,338. France’s CAC lost 1.1%. The UK’s FTSE (sensitive to continental trends despite Brexit) fell 0.4%.
Investors are fleeing risk amid the collapse of Iran negotiations and the escalation of the trade war with the US. Additional pressure came from corporate news. Major defense contractor Rheinmetall tumbled 9.2% after weak earnings and a downgrade. Airline group IAG (parent company of British Airways and Iberia) warned that the sharp jump in jet fuel prices due to the war would significantly dent profits, sending its shares down 3%.
The European economy is frozen in tense anticipation. The ECB has frozen rates, but markets expect a hike as early as June. The euro is weakening due to investors fleeing to the dollar. Industry shows faint signs of life, but stock indices have collapsed under the weight of geopolitical and tariff threats. Europe finds itself hostage to two conflicts: a military one on its southern borders and a trade war with its key ally across the ocean.
