Rising "oil prices," "industrial chain disruptions," and "livelihoods under pressure"—an overview of the impact of the US, Israel, and Iran conflict on the European economy

One month after the U.S. and Israel launched military strikes against Iran, the geopolitical conflict has quickly spread into Europe. From surging oil and gas prices to tightening electricity supply, and from shipping disruptions to rising corporate costs, a series of knock-on effects is becoming increasingly apparent.

International observers believe that Europe is highly dependent on external energy supplies, and this round of shocks has once again exposed structural vulnerabilities. The spillover effects of the fighting have become a key variable for testing Europe’s economic resilience, and they also force Europe to reexamine energy self-sufficiency and its industrial structure.

“Oil-price fever”: inflation makes a comeback as supply worries loom

Tensions in the Middle East have continued, directly driving a surge in Europe’s energy prices. Although the International Energy Agency has pushed for the release of the largest-ever strategic oil reserves in history, Europe has benefited only marginally in practice, and oil prices remain high.

The Chair of the European Commission, von der Leyen, said recently that since the outbreak of the fighting, the EU’s oil and natural gas import bills have increased by an additional roughly €6 billion. As the Netherlands-based ownership transfer center for TTF gas futures—Europe’s natural gas benchmark—TTF natural gas futures prices have risen by nearly 80% month-on-month. London Brent crude oil futures prices have increased by more than 40% month-on-month.

Europe faces not only pressure from rising oil prices, but also pressure from the linked rise in natural gas and electricity prices. Goldman Sachs analyst Daan Struyven believes that because about 60% of Europe’s electricity prices are determined by natural gas, this makes Europe more vulnerable under energy-crisis shocks.

Recently, institutions broadly lowered their expectations for Europe’s economic outlook. On the 26th, the OECD released a report, cutting its forecast for this year’s economic growth in the euro area to 0.8% and raising its inflation expectation to 2.6%. The European Central Bank recently lowered its forecast for this year’s euro-area economic growth to 0.9% and raised its inflation expectation to about 2.6%.

What is worth watching is that risks are evolving from “rising energy prices” to “unstable supply.” Wael Sawan, CEO of oil major Shell, warned that if crude oil transportation in the Middle East continues to be disrupted, Europe could face a fuel shortage within weeks. Katrin Lehrscheidt, Germany’s Federal Minister for Economic Affairs and Energy, said that if the conflict continues, Europe’s pressure on energy supply may become concentrated from late April to May.

“Industrial derailment”: squeezed from both energy and logistics

Even before the escalation of the Ukraine crisis, European industry had already been under pressure from high energy costs after moving away from Russian natural gas, and the U.S.-Israel war against Iran further amplified the shock. As a foundational energy source for the transport system and an important raw material for industrial production, rising oil prices not only directly increase logistics costs, but also pass through the raw-material side to various industrial products, creating sustained squeeze on energy-intensive industries.

Against the backdrop that the impact of U.S. tariff policies has not yet faded, European companies are facing multiple pressures at the same time, including energy prices staying high, logistics costs rising rapidly, and weak external demand. Manufacturing conditions are clearly tightening, and risks are shifting from “cost increases” to “imbalances in the industrial supply chain.”

At the macro level, high energy prices and supply uncertainty are forming a systemic shock to Europe’s manufacturing sector, with countries such as Germany and Italy hit first. ECB President Lagarde said that businesses are more sensitive to changes in costs, and price pass-through accelerates—meaning energy shocks will be transmitted more quickly down the industrial supply chain, further reinforcing inflation persistence.

At the industry level, agriculture, chemicals, and automobiles have been hit most severely. Kasper Bruzski, head of macro research at ING, said that these sectors were already affected by America’s added tariffs and weak demand, and with the addition of rising energy costs, they are now bearing “multiple squeezes.”

Lorenzo Poli, CEO of Italian Sassi Paper Company, said that the related impacts are gradually being passed through to end products, potentially affecting everyday consumer goods such as paper products. Axel Ebert, CEO of German industrial microdispersed technology manufacturer Ebert Process Technology, said that as shipping risks in the Middle East increase, transporting raw materials now requires routing around Africa’s Cape of Good Hope, and transportation costs have risen by about 40%.

“Strained livelihoods”: emergency policies ramp up

Rising energy prices affect household transportation and energy spending, leading to a decline in residents’ purchasing power and squeezing other consumption spending. At the same time, increased energy burdens erode consumer confidence, and consumption expectations among residents in major euro-area economies have noticeably weakened.

Samina Sudan, an economist at the German Institute for Economic Research, said that cost increases are gradually being passed through to end-consumer markets, with price pressure rising for products in areas such as baking and dairy processing. As feed costs for corn, soybeans, and other inputs rise, meat prices may be pushed up as well, further increasing the burden on residents’ living expenses.

In response to the shocks, European countries have rolled out measures in dense succession. Spain has introduced a package totaling €5 billion, covering around 80 measures, including lowering energy taxes and fees and providing subsidies to the transportation and agriculture sectors. Italy has implemented fuel tax relief. Poland plans to cut fuel value-added tax. Serbia has cumulatively reduced excise taxes on crude oil by 60%.

With oil prices high, European residents and businesses are showing a clear increase in attention to renewable energy. Gregg Jackson, founder and CEO of UK Octopus Energy, said that since the outbreak of the Iran war, the company’s sales of solar panels and heat pumps have risen significantly. Data from a German online car trading platform shows that since early March, the share of electric vehicles in users’ searches has climbed from 12% to 36%. In the French market, the share of electric vehicle sales has also risen markedly in the short term.

International observers noted that through measures such as tax cuts and subsidies, European countries have, to a certain extent, offset short-term shocks. However, fiscal space is being continuously consumed, and the sustainability of the policies faces a test. From the Ukraine crisis to the fighting in the Middle East, repeated shocks of external energy risk are continually exposing Europe’s structural vulnerabilities in external dependence, forcing Europe to think about structural adjustments, green transitions, and pathways to sustainable development.

Source: Xinhua News Agency

Author: Li Hanlin