There are already several indicators that warn of the conflict in the Middle East that the US and Israel unleashed a month ago. The blow will be important in the economy of the Old Continent, and this has already been confirmed by its highest authority in monetary policy: Christine Lagardepresident of the European Central Bank.
Inflation in March, according to the latest advance of the Consumer Price Index. Prices have become more expensive mainly due to the rise in fuel prices. The Strait of Hormuz remains closed and a fifth of global oil traffic sails through it. Although there is a historic release of strategic reserves, the market assumes that curves are coming.
It is something that Lagarde already confirms. In a recent interview with The Economist the French uses serious terms. “The damage is already too great.” An immediate reopening of Hormuz will not make the problems dissipate. “We are facing a real shock (…) that probably goes beyond what we we can imagine now”.
In fact, Lagarde emphasizes that despite an imminent reopening of the strait, the recovery from this energy shock It could take years to be noticed. “The damage is already too great,” he emphasizes, which would mean that the lost energy production in the Middle East could not be restored in months. It’s not just that the strait remains impassable: oil and refining plants have been damaged in the Persian Gulf.
“Most experts are already talking about years”
Christine Lagarde removes any ray of optimism regarding the conflict in the Middle East and its economic consequences. “Its effects will last and will probably do so beyond the current objectives. We are facing a real shockprobably greater than we can imagine.
“There are people who are very optimistic or determined to maintain that optimism, that hope, that positive scenarios will materialize soon and we will return to normal in the short term. That is not what the technical experts are telling us: a lot of extraction capacity, distribution capacity, and many refining plants have already been damaged. There is no way to restore everything in a few months“, focuses.
“Most experts talk about years,” said the president of the ECB, asked how long this crisis will actually last.
These will be long years if you take into account that some experts warn that stagflation is approaching Europe. Lagarde is also concerned that although the European Union is “well positioned to respond” to this crisis, it has less room for fiscal maneuver than when the war in Ukraine broke out. So, the Twenty-seven spent on average close to 2.5% of GDP to mitigate its effects.
Entering stagflation will put the continent in a dead end. It occurs when the economy stops growing (stagnates) but inflation remains high. The dilemma is perverse: measures that can alleviate inflation (tighten monetary policy, raise rates) can slow growth, but initiatives designed to encourage growth or lower unemployment can cause inflation to rise even further.
