This report provides an analysis of the economic outlook for the euro area and of the related keypolicy challenges. Taking into account the impact of the COVID-19 pandemic, the report looks into the emerging risks of divergence stemming from the ongoing energy crisis, and in particular from high and vastly different inflation rates recorded across the euro area. This situation increases the need for coordinated fiscal and monetary policies, also taking into account sustainability constraints and the need to continue supporting public investment in the green and digital transition. The high inflation recorded in the euro area also poses several structural policy challenges to increase the resilience of the economy. These are in particular related to developments on the labour market and to social policy. The report also assesses the impact of the high inflation on financial markets, the related normalisation in monetary policy, and the recent deterioration in the economic outlook, both as regards financial integration and macro-financial stability.