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The conflict with Iran could have severe economic consequences for Europe. Economists warn that a prolonged energy shock could put pressure on the euro and even trigger a deep recession in Europe. The war thus exposes a fundamental vulnerability of the European economy: its dependence on imported energy.
Due to the war in Iran and the blockade of the Strait of Hormuz, oil prices rose by more than 15 percent, while gas prices temporarily doubled. The price of European jet fuel has already risen by more than 70 percent this week. The Strait of Hormuz is the world’s most important energy corridor: around 20 percent of global oil production and approximately 20 percent of global LNG exports pass through this narrow waterway.
The potential loss of oil supply is far greater than in comparable situations in the past (source: International Man)
The energy minister of Qatar warns that a war in the Middle East could ‘cripple the global economy’. According to him, all energy exporters in the Gulf region could halt production within weeks, with oil prices potentially reaching 150 dollars per barrel.
The euro lost around 2 percent against the US dollar this week. Due to Europe’s strong dependence on imported energy, this ‘energy shock’ hits European economic growth and purchasing power much harder than it does in the United States.
The euro exchange rate is falling (source: Bloomberg)
The reaction to Russia’s invasion of Ukraine clearly shows how sensitive the euro is to an energy shock. According to analysts at Barclays, every 10 percent increase in oil prices makes the dollar 0.5 to 1 percent stronger against the euro.
German economist Daniel Stelter told Euronews that “an already structurally weak euro, burdened by low growth, high debt and political fragmentation, will come under further pressure as capital flows into dollar-denominated assets considered safe havens.”
For Europe, the duration of the conflict appears to be decisive. A regional escalation in the Middle East, in which energy supplies to Europe remain disrupted for an extended period, would represent the worst possible scenario.
Carsten Brzeski, chief economist at ING, warns that a blockade of the Strait of Hormuz lasting several weeks could push oil prices to 100 dollars per barrel or higher. In that scenario, he says the euro could weaken further to around 1.10 dollars. Stelter is even more pessimistic. According to him, in the worst-case scenario the euro could fall well below the 2022 low, towards 0.90 to 0.95 dollars.
According to Stelter, a prolonged conflict would primarily hit Europe’s energy-intensive sectors, while European stock markets could fall much harder than US markets. Stagflation could trigger a sell-off on the German stock market. At the same time, energy rationing, production stoppages and further relocation of industry abroad could once again become pressing issues.
In a scenario involving a prolonged war and a blockade lasting several months, he even foresees a deep recession in Germany: “Higher energy prices act like an additional tax and depress consumption and investment. Already weak industrial countries such as Germany would slide into a deep recession, while the entire eurozone would at least enter a technical recession.”
Normally, a weak euro can support exports, but according to him that mechanism will not work this time, because higher energy prices are slowing global economic growth.
Stelter expects the ECB to intervene in this scenario to prevent a new debt crisis. Long-term interest rates could rise due to inflation fears, while tensions in highly indebted countries such as France could increase because they will have to pay higher risk premiums.
The ECB’s mandate is to keep inflation around 2 percent, but rising energy prices are pushing inflation higher again. If the conflict remains short-lived, the ECB may still be able to cut interest rates to support the economy, but a prolonged conflict creates new problems as inflation rises. In that case, the ECB cannot lower rates and may even have to raise them again. Stelter also sees increasing pressure to support highly indebted countries through bond purchases, which could deepen doubts about the euro’s long-term stability.
A prolonged war in the Middle East could therefore develop into an economic disaster for Europe. Precisely for that reason, one would expect politicians to do everything possible to ensure affordable and reliable energy supplies quickly. So far, however, the seriousness of the situation does not yet seem to have fully sunk in.
EU countries gave final approval on Thursday to a new climate target requiring a 90 percent reduction in CO₂ emissions by 2040. In practice, this amounts to an 85 percent emissions reduction for European industries compared with 1990 levels. For the remaining 5 percent, the EU wants to use carbon credits, paying developing countries to reduce emissions on Europe’s behalf.
Germany and Italy are now pushing for a relaxation of the emissions trading system, under which companies must buy emission allowances for their output. Spain and many other countries, however, oppose such weakening.
Putin said this week that he is considering halting gas sales to Europe, after European politicians had already decided to ban Russian gas by the end of 2027. Russian gas still accounted for an estimated 13 percent of total European Union gas imports in 2025. According to him, alternative markets are now emerging: “Other markets are opening now. Some clients emerged that are ready to buy that same natural gas at higher prices.”
Meanwhile, the new Dutch cabinet has indicated that it does not want to keep the Groningen gas field available for emergency situations and will continue with the filling in of gas wells.
On Saturday afternoon, our English-language channel will publish a conversation with :contentReference[oaicite:0]{index=0} on the potentially disastrous economic consequences of this conflict. Subscribe to the channel so you don’t miss it.
