2025 Adverse Scenario — Key Numbers

The adverse scenario is the core of every EU-wide stress test. It defines the hypothetical crisis that banks must withstand — and its severity determines how much capital they need to hold. For the 2025 exercise, the ESRB and ECB designed a scenario centred on escalating geopolitical tensions, trade fragmentation, and a global commodity price shock. This article breaks down the key numbers: what the scenario assumes, how severe it is compared with previous exercises, and where the impact concentrates across countries and asset classes.

All figures below are drawn directly from the official ESRB/ECB macro-financial scenario data published on 20 January 2025 and updated on 26 February 2025.

The Narrative: What Triggers the Crisis

The adverse scenario is built on a narrative of compounding geopolitical and economic shocks. Understanding the causal chain is essential to interpreting the data — each variable in the scenario follows logically from the assumed trigger events.

These four shock channels interact and reinforce each other. The trade disruption reduces export demand, the commodity surge increases costs, the confidence collapse depresses consumption and investment, and the financial market correction tightens the credit supply — creating a deep, prolonged recession.

GDP: A Severe and Prolonged Contraction

Under the adverse scenario, EU real GDP contracts by 2.3% in 2025 and 4.2% in 2026 before stabilising at 0.0% in 2027. The cumulative decline of 6.3% represents a severe recession — comparable to the global financial crisis in magnitude and more prolonged in duration. By 2027, EU GDP stands 10.4% below its baseline level.

The decline is primarily driven by foreign factors. At the end of the three-year horizon, the ESRB’s decomposition shows that foreign shocks — commodity price surges and the reduction in external trade — account for approximately half of the total GDP deviation from baseline. Domestic factors, including uncertainty and confidence shocks, contribute the other half, with financial shocks exerting their strongest impact towards the end of the horizon.

Country-Level GDP: Wide Dispersion Across the EU

The EU aggregate masks a wide range of country-level outcomes. The cross-country interquartile range for cumulative adverse GDP growth runs from −6.9% to −5.1% — significantly wider than in the 2023 exercise, reflecting differences in trade openness, energy dependence, and structural features of each economy.

Small, open, export-dependent economies face the steepest GDP declines. Estonia (−8.3%), Sweden (−8.0%), and the Czech Republic (−7.9%) top the list — all are heavily integrated into global manufacturing supply chains. At the other end, Ireland (−3.9%) and Spain (−4.1%) are relatively less affected, partly due to their service-oriented economic structures and, in Spain’s case, partial recovery in 2027.

Inflation: A Temporary Resurgence

Unlike the 2023 scenario — which modelled persistent high inflation over the full horizon — the 2025 adverse scenario features a sharper but shorter-lived inflation spike. EU HICP inflation rises to 5.0% in 2025 and 3.5% in 2026, driven almost entirely by energy price shocks. By 2027, inflation falls back to 1.9%, slightly below the baseline value, as demand destruction outweighs the supply-side inflationary pressure.

The energy price assumptions behind this inflation path are substantial. Oil prices jump 57% above the starting point in 2025, gas prices surge 65%, and metal prices rise 48%. These shocks ripple through manufacturing and transportation costs, compressing profit margins and driving up consumer prices. However, the severe demand contraction limits second-round effects — higher wage claims are largely offset by rising unemployment and weakened bargaining power.

Unemployment: A Sharp Labour Market Deterioration

The adverse scenario assumes a strong and widespread increase in unemployment across the EU. The cumulative rise is 5.8 percentage points by 2027, peaking above levels seen during the global financial crisis. EU unemployment reaches 7.7% in 2025, climbs to 10.3% in 2026, and reaches 11.6% by 2027 — compared with a baseline level of just 5.5%.

The labour market shock is driven by the scenario’s narrative of severe confidence collapse and corporate cash buffer depletion. Firms facing compressed margins, falling demand, and tighter credit conditions respond by cutting workforces aggressively — particularly against the backdrop of elevated labour hoarding that characterised the post-pandemic years. The unwinding of this hoarding amplifies the unemployment spike.

Country-level variation reflects pre-existing labour market conditions and export dependence. Sweden faces one of the steepest unemployment increases, reaching 15.1% in 2026, while Spain — starting from the EU’s highest base rate of 11.5% — sees its unemployment rate surge to 16.8%. Countries with low starting rates, such as the Czech Republic (2.7%) and Poland (3.0%), experience the largest absolute jumps but remain at lower end-point levels.

Interest Rates and the Yield Curve

The interest rate path under the adverse scenario reflects a nuanced dynamic. In the first year, the resurgence of inflation pushes short-term market expectations modestly higher — the one-year euro swap rate reaches 3.3% in 2025, up from 2.1% in the baseline, though only slightly above the 3.2% starting level in 2024. From 2026 onwards, rates gradually decline as inflation subsides and the economic contraction deepens.

The term structure flattens under stress, with the yield curve slightly inverting. Long-term euro area sovereign yields rise more sharply due to debt sustainability concerns — sovereign risk premia widen, particularly in countries with higher post-pandemic government debt levels and rising military expenditure. The scenario assumes that government expenditure does not change, adding fiscal pressure at a time when the economic downturn is eroding tax revenues.

For banks, this interest rate path creates a complex dynamic. The modestly higher short-term rates in 2025 initially support net interest margins, but the flattening curve and widening credit spreads compress profitability over the rest of the horizon. Banks with large fixed-rate asset portfolios face unrealised losses as yields rise, while those dependent on wholesale funding see costs increase.

Financial Markets: A Broad-Based Correction

The adverse scenario assumes a violent repricing across global financial markets. EU stock prices fall 50% in the first year alone, with only a slow, partial recovery through 2026 and 2027. The United States experiences the largest equity correction at −61%, reflecting the unwinding of stretched tech valuations.

Credit default swap spreads rise sharply across all rating categories. The iTraxx Sub-financials 5Y index reaches 544 basis points in 2025 — a near fivefold increase from the 2024 starting level of 115 basis points. The iTraxx Crossover 5Y (high-yield) reaches 686 basis points. These spread shocks translate directly into mark-to-market losses for banks holding corporate and financial sector bonds.

Real Estate: CRE Hit Hardest

The scenario applies severe real estate price shocks, with the commercial real estate market bearing the heavier burden. At the EU level, CRE prices decline by a cumulative 29.5% over the three years — a devastating correction driven by tightening credit conditions, deteriorating business sentiment, and structural shifts in demand for office space. Residential prices fall by a cumulative 15.7%, reflecting reduced household purchasing power and higher mortgage costs.

At the country level, CRE price declines range from −22.5% in Italy to −39.8% in Slovakia. For RRE, the Netherlands (−23.5%), Denmark (−23.8%), and Sweden (−25.2%) face some of the steepest residential corrections — reflecting pre-existing overvaluation in these markets.

How This Compares to Previous Exercises

The 2025 scenario is slightly more severe than 2023 in GDP terms and materially more severe than the 2021, 2020, and 2018 exercises. Its distinguishing feature is the emphasis on trade disruption and geopolitical risk, which produces wider cross-country heterogeneity — reflecting different levels of trade openness and energy dependence across EU economies.

What This Means for Financial Institutions

For banks participating in the stress test, the adverse scenario directly determines the projected credit, market, and operational risk losses that feed into the published results. Banks with portfolios concentrated in export-oriented manufacturing, commercial real estate, or energy-dependent sectors face the steepest projected losses, particularly in countries like Estonia, Sweden, and Germany where GDP contractions are most severe.

For non-bank financial institutions, asset managers, and corporate treasurers, the scenario data provides a consistent framework for internal stress testing, counterparty risk assessment, and portfolio scenario analysis. The ESRB publishes the full dataset — including country-level GDP, unemployment, inflation, interest rate, and real estate price paths — enabling institutions to apply the same scenario assumptions to their own exposures.

To explore the full scenario data interactively — selecting any country and comparing baseline versus adverse paths across GDP, unemployment, inflation, and real estate — use our free EBA 2025 Stress Test Scenario Explorer. For the sector-level GVA breakdown, see our dedicated sectoral impact analysis.

Explore the Full Scenario Data