The European Commission warned on Thursday that the eurozone economy will experience a noticeable slowdown in 2026 following the outbreak of war in the Middle East, which has triggered the region’s second significant energy crisis in less than five years.

The extent of the damage will depend heavily on the duration of the conflict and its impact on global energy supplies.

“Before the end of February 2026, the EU economy was set to keep expanding at a moderate pace alongside a further decline in inflation, but the outlook has changed substantially since the outbreak of the conflict,” the Commission said in its Spring 2026 Economic Forecast.

The Commission now expects euro zone GDP growth to slow to 0.9% in 2026, down from a previous projection of 1.2% and well below the 1.3% recorded in 2025. Growth is then forecast to edge up only modestly to 1.2% in 2027.

Inflation forecasts were revised significantly higher, rising to 3.0% in 2026 (from 1.9%) and 2.3% in 2027 (from 2.0%). These upward revisions reflect surging oil prices above $100 per barrel and severe disruptions to shipping through the Strait of Hormuz, which have created a substantial supply-side shock.

The Commission noted that domestic consumption is still expected to remain the primary driver of growth, but both consumer and business sentiment have deteriorated rapidly. Investment is likely to be constrained by tighter financing conditions, lower profits, and heightened uncertainty, while weaker global demand is weighing on exports.

ECB Likely to Hike Rates in June for Credibility

The worsened inflation outlook strengthens the case for the European Central Bank to raise interest rates at its June 11 policy meeting. Markets are pricing in one or two additional hikes over the next 12 months, which would lift the deposit rate from the current 2% toward 2.50–2.75%.

ECB policymaker Olli Rehn, Governor of the Bank of Finland, acknowledged the difficult balancing act.

“The euro area was sliding towards the ECB’s ‘adverse scenario’ of slower growth and higher inflation, which may force it to raise rates for the sake of credibility,” he said.

However, Rehn struck a relatively measured tone, noting that longer-term inflation expectations remain well anchored around the ECB’s 2% target. He pointed out that gas prices have not risen as sharply as oil, wage growth continues to moderate, and there are limited signs of second-round effects so far.

“From the standpoint of medium-term orientation, the critical thing is whether we see evident signs of second-round effects, and/or de-anchoring of inflation expectations… we see some vibration in the short-term inflation expectations, but no significant deviation in medium- to long-term inflation expectations,” he said.

Rehn also made clear that the ECB will not be dictated by market pricing, saying: “Market forces have priced in some rate hikes, but our policies are not dictated by the market forces. We take our decisions independently.”

The Commission outlined a more pessimistic alternative scenario in which the conflict drags on, causing energy prices to peak later in 2026 (with Brent crude potentially reaching $180 per barrel) before gradually normalizing by the end of 2027. In this case, inflation would remain elevated, and the economy would fail to rebound in 2027. European Economy Commissioner Valdis Dombrovskis said that under this adverse scenario, growth forecasts for this year and next would be roughly halved.

Worsening Public Finances and Regional Divergences

Weaker growth, higher interest rates, energy subsidy measures, and increased defense spending are expected to strain public finances. The euro zone budget deficit is projected to widen from 2.9% of GDP in 2025 to 3.3% in 2026 and 3.5% in 2027.

France, Germany, and Italy are all set to see larger deficits than previously forecast. Italy is expected to overtake Greece as the bloc’s most indebted country in 2027, with public debt reaching 139.2% of GDP.

Rehn highlighted important differences in exposure across the region, noting: “You have obviously quite different impacts of the energy price shock… Northern European countries, France and the Iberian Peninsula would be partly shielded… with Germany, Italy and Central Europe hit harder.”

Despite the challenges, the Commission emphasized that the euro zone is better prepared for this shock than the 2022 energy crisis caused by Russia’s invasion of Ukraine. Years of investment in energy diversification, renewables, and efficiency improvements have enhanced resilience. Policymakers have also been advised to avoid overly generous fuel subsidies that could further strain limited fiscal space.

The latest forecasts underscore the euro zone’s persistent vulnerability to external energy shocks and the delicate trade-off facing the ECB between controlling inflation and supporting growth. While a rate hike in June looks almost certain to safeguard credibility, further tightening must be carefully calibrated to avoid pushing an already fragile economy into recession.

Economists believe the duration of the Middle East conflict remains the single biggest risk factor. A swift resolution and reopening of the Strait of Hormuz would materially ease pressures. A prolonged war, however, risks creating stagflationary conditions, higher inflation combined with weaker growth, that would test both monetary and fiscal policy frameworks across Europe.

A Paris appeals court on Thursday found Airbus and Air France guilty of corporate manslaughter over the 2009 crash of Flight AF447, overturning earlier acquittals and delivering a landmark ruling in one of the deadliest disasters in modern aviation history.

The decision marks a dramatic reversal after a lower French court cleared both companies in 2023, despite years of pressure from victims’ families who argued that failures in aircraft design, pilot training, and operational oversight contributed to the tragedy that killed all 228 passengers and crew aboard the Rio de Janeiro-to-Paris flight.

“Justice has absolutely been done,” said Daniele Lamy, president of the AF447 victims’ association, who lost her son in the disaster.

The Airbus A330 disappeared over the Atlantic Ocean on June 1, 2009, during a nighttime storm while en route from Brazil to France. The crash stunned the aviation industry and triggered one of the most complex investigations in commercial aviation history, compounded by the difficulty of locating the aircraft’s black boxes in deep ocean waters.

Thursday’s ruling follows nearly two decades of legal and technical disputes that exposed tensions within France’s aviation establishment over responsibility for the crash. For many relatives, the appeals trial became less about financial penalties and more about securing official acknowledgment that corporate failures played a role in the catastrophe.

The appeals court imposed the maximum corporate manslaughter fine of €225,000 ($261,720) on each company, aligning with prosecutors’ requests during last year’s eight-week retrial. The penalties themselves are financially insignificant for two global aviation giants, amounting to only minutes of revenue, but legal observers say the symbolic weight of the convictions is substantial.

Airbus immediately said it would appeal to France’s highest court, signaling that the legal battle may continue.

But victims’ groups urged both companies to end the process.

“There is no human, moral or legal justification in continuing this procedure,” Lamy told reporters outside the courtroom.

The ruling is likely to reignite debate over corporate accountability in aviation disasters, particularly when multiple layers of technical malfunction, operational procedure, and human error intersect.

Under French law, prosecutors had to prove not only negligence but also a direct causal link between corporate failures and the crash itself, a threshold that has historically made convictions in aviation cases difficult to secure. The court’s decision suggests judges accepted prosecutors’ arguments that shortcomings within both Airbus and Air France materially contributed to the chain of events that led to the disaster.

Investigators from France’s BEA air accident agency concluded in 2012 that the aircraft’s pilots lost control after the plane’s pitot tube sensors iced over, causing inconsistent speed readings. The crew then mistakenly placed the aircraft into an aerodynamic stall from which it never recovered.

However, prosecutors broadened the focus beyond cockpit actions, arguing that Airbus had prior knowledge of pitot tube vulnerabilities and that Air France failed to adequately prepare pilots for high-altitude stall scenarios despite earlier warning incidents.

The case became a defining moment for the aviation industry because it highlighted how highly automated aircraft can still leave crews vulnerable during rare but critical system failures.

The AF447 crash prompted sweeping changes across global aviation, including revised pilot training standards, expanded stall-recovery procedures, and accelerated replacement of certain pitot tube models on long-haul aircraft.

Families of victims from 33 countries packed the courtroom as judges slowly read the names of those killed, many from the same families, underscoring the enduring emotional weight of the case.

Legal experts say the verdict may influence future litigation involving aircraft manufacturers and airlines by reinforcing expectations that companies proactively address known technical risks and operational weaknesses before they contribute to accidents. The ruling also lands at a sensitive time for Airbus, which has spent years rebuilding its reputation after past safety controversies while simultaneously expanding production to meet surging global aircraft demand.

For Air France, the judgment revives one of the darkest chapters in the carrier’s history. The airline has long maintained that the crash resulted from a complex sequence of technical and human factors rather than deliberate negligence. The drawn-out proceedings have also illustrated the broader difficulties of assigning criminal responsibility in aviation disasters, where accidents often stem from interconnected failures rather than a single catastrophic mistake.

Any appeal to France’s Court of Cassation would focus narrowly on legal interpretation rather than rehearing technical evidence, but it could still extend proceedings for years, prolonging a case that has already lasted nearly a generation.

For victims’ families, however, Thursday’s verdict represented a turning point after 17 years of uncertainty, investigations, and courtroom battles. The crash of AF447 remains France’s deadliest aviation disaster and one of the defining air safety tragedies of the 21st century.

Japan’s largest banks are enjoying their strongest earnings cycle in years, buoyed by rising domestic interest rates, stronger corporate borrowing, and a revival in wholesale banking activity.

But analysts warn that the record-breaking profit surge may prove difficult to sustain as credit costs rise, overseas rate cycles soften, and geopolitical tensions inject fresh uncertainty into global markets.

The latest earnings from Japan’s three megabanks, Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Mizuho Financial Group, underscore how dramatically the country’s banking landscape has changed after decades of ultra-low interest rates compressed lending margins and weakened profitability.

Mitsubishi UFJ Financial Group, Japan’s largest lender, reported net profit of 2.4 trillion yen for the fiscal year ended March 2026, up 30% from a year earlier and marking its third consecutive record annual profit. Rival lenders Sumitomo Mitsui Financial Group and Mizuho Financial Group also delivered record earnings, with profits climbing 34% and 41%, respectively.

The earnings boom comes off a growing shift in Japan’s financial system after the Bank of Japan gradually moved away from years of negative interest rates and aggressive monetary easing. Higher domestic yields have widened lending spreads for banks, improving net interest income after years in which profitability was constrained by near-zero borrowing costs.

“Higher yen rates are improving lending margins and supporting net interest income, while healthy corporate funding demand and stronger fee income are adding to revenue,” said Kaori Nishizawa, Director of Banks at Fitch Ratings.

The recovery in Japan’s banking sector is also being driven by inflation returning to the economy after decades of stagnation, encouraging businesses to borrow and invest again. Analysts quoted by Reuters say stronger wholesale banking activity, corporate financing deals, and cross-border transactions have become increasingly important earnings drivers for Japan’s biggest lenders.

Nomura Holdings reiterated its bullish stance on the sector, naming Sumitomo Mitsui Financial Group and Mizuho Financial Group as its preferred picks, arguing that the megabanks still appear undervalued relative to their earnings strength.

Analysts Warn of Challenging Future

Beneath the headline numbers, analysts see growing signs that the sector may be approaching a more difficult phase.

A large portion of recent earnings growth has been supported by market-related gains, overseas acquisitions, and one-off factors that may not be easily repeatable. At the same time, Japanese banks are facing intensifying competition for deposits as higher rates begin reshaping customer behavior after years of abundant cheap liquidity.

“Earnings growth is likely to moderate,” Nishizawa said, noting that recent upside has partly come from exceptional items, including acquisition-related contributions and gains linked to financial markets.

“Banks also face higher credit costs, competition for deposits and pressure from broader macroeconomic and geopolitical risks,” she added. “As such, sustainability of profit growth at current levels is likely to be challenged.”

That warning is becoming increasingly relevant as global economic conditions deteriorate under the weight of rising energy prices and geopolitical instability linked to the Middle East conflict. Japanese lenders, which have significantly expanded overseas lending operations over the past decade in search of higher returns, are now more exposed to external shocks than in previous banking cycles.

The renewed volatility in oil markets is particularly important for Japan because the country remains heavily dependent on imported energy. Higher crude prices can weaken corporate profitability, raise borrowing risks, and slow global economic activity, indirectly affecting Japanese lenders’ loan portfolios and investment banking businesses.

Junichi Hanzawa, MUFG’s chief executive, recently warned that escalating tensions in the Middle East could negatively affect the bank’s earnings outlook if the conflict intensifies further before year-end.

Sumitomo Mitsui Financial Group also acknowledged in its earnings filing that “Middle East-related risks, including potential spillover effects, are partly provisioned for and remain closely monitored.”

Meanwhile, Mizuho Financial Group said it would “continuously monitor the external environment and its potential impacts, and flexibly revise its financial outlook if necessary.”

Another growing concern for investors is that the profit boost from higher overseas interest rates may soon begin to fade. Japanese banks have benefited heavily from elevated rates in the United States and Europe, which increased returns on foreign loans and fixed-income holdings. But expectations that global central banks may eventually return to monetary easing could reduce those gains.

Lorraine Tan, director of equity research in Asia for Morningstar, expects Mitsubishi UFJ Financial Group’s earnings growth to slow to around 5% from fiscal 2027 as global interest rates outside Japan ease and contributions from its stake in Morgan Stanley moderate.

Tan also forecast slower growth for Sumitomo Mitsui Financial Group, citing the lender’s substantial overseas exposure, with roughly 35% of its loan book outside Japan.

Similarly, analysts expect margin expansion at Mizuho Financial Group to weaken once overseas rate-cut cycles resume. Still, many analysts argue the current banking recovery is fundamentally stronger than previous earnings upswings because it is tied to structural economic changes within Japan itself.

Koichi Niwa, an analyst at UBS Group, said the recent improvement appears more durable because it is being supported by domestic inflation, higher Japanese interest rates, and stronger corporate financing demand rather than temporary financial market gains alone.

But he cautioned that stronger wholesale banking activity also requires significantly more capital.

“Financing mergers and acquisitions, large corporate lending, overseas loans and structured transactions often require more capital than domestic lending,” Niwa said.

“As a result, even if profits are growing, banks also need to allocate more capital to support balance-sheet expansion.”

That balancing act may ultimately determine whether Japan’s banking revival evolves into a sustained long-term transformation or proves to be another cyclical surge vulnerable to global shocks and shifting monetary conditions.