A new Middle East conflict and a US assets sell-off are the two biggest risks to the euro zone, which, if twinned, could tip the euro area into a recession and send inflation near 5%, the European Stability Mechanism said in a report today.
Europe is now far more exposed to American financial markets than a decade ago.
The euro zone’s GDP exposure to the US stood at 47% last year, compared with 18% in 2013, the ESM said in its first annual report, titled Euro Area Stability Watch.
“Rising political uncertainty, longer-run fiscal sustainability concerns, and stretched equity valuations built on artificial intelligence-related earnings expectations create the potential for a sudden asset price correction emanating from the US,” the report said.
The ESM, a European crisis fund worth over €430 billion, outlined this vulnerability alongside the possibility of a new Middle East energy shock.
The Iran war had a major impact on global energy markets and supply chains due to the four-month closure of the vital shipping lane – the Strait of Hormuz.
American and Iranian negotiators have yet to agree a lasting peace since their interim deal last month.
If both risks hit, the euro area’s GDP may only rise 0.6% in 2026 and contract by 0.4% in 2027.
“The euro area has large and increasing holdings of US portfolio investments. At end-2025, the US accounted for nearly half of the euro areaʼs total global portfolio holdings – 59% of equity positions and 36% of debt, compared with roughly one-third in 2013,” the report said.
“Therefore, a material repricing of US assets would bring substantial direct losses for European investors,” it cautioned.
