| Israel’s “pre-emptive” strikes on Iranian nuclear and military sites this morning sent shockwaves through the global economy.
Much of the initial impact was predictable. Oil prices soared to their highest level in months; US and EU stocks plunged (despite a surge in defence firm equities); and US and German bonds rallied as investors sought safety amid the market turbulence.
The longer-term effects of Israel’s attacks are less easily anticipated, given that they depend upon the extent to which the conflict escalates.
The initial signs, however, are far from promising. Israeli Prime Minister Benjamin Netanyahu said the conflict will last for “as many days as it takes” and warned Israelis that it is “very possible” they will have to seek shelter “for an extended period of time, much longer than we’ve been used to until now”.
Iran has also condemned the attacks as a “declaration of war” and launched a retaliatory offensive comprising more than 100 drones against Israel just a few hours ago.
Should the conflict persist, oil prices will almost certainly remain elevated, exacerbating the woes of Europe’s long-suffering energy-intensive industries and potentially triggering a resurgence in price pressures that have eased considerably in recent months.
Carsten Brzeski, head of macro at ING research, warned that a “significant” escalation of the conflict would further weaken consumer and business confidence across the euro area, thus depressing already anaemic levels of demand and investment.
The combined impact of high energy prices and uncertainty could “over a longer period of time” add “a stagflationary element to the eurozone outlook” in which high inflation and weak growth become entrenched across the bloc, Brzeski added.
Philipp Lausberg, a senior analyst at the European Policy Centre, said that such a scenario would be reminiscent of the ruinous stagflation witnessed across Europe following the Arab-Israeli Yom Kippur War in 1973.
A resurgence of price pressures would also force the European Central Bank to hike interest rates, thereby further hampering business investment and growth, he said.
“The ECB wants to lower rates to stimulate the economy, but fighting inflation is its main goal,” said Lausberg. “So it would have to raise rates again, which wouldn’t be good for Europe.”
Nuclear fears
The absolute worst-case scenario would involve the use of nuclear weapons by Israel, which would potentially trigger a wider war in the Middle East that could spark an all-out nuclear conflagration involving the US or other Western or regional powers.
Israel, which has possessed nuclear weapons since the 1960s, is believed to possess around 90 nuclear warheads but has never officially confirmed nor denied their existence.
Experts, however, downplayed the risks that the current conflict will escalate into a global or even regional nuclear war.
“I think the risk of nuclear escalation is not zero. But I do not think the risk is very high, unless there are attacks from Iran that take out Israeli leadership,” said Susi Snyder, Programme Coordinator for the International Campaign to Abolish Nuclear Weapons (ICAN), a Geneva-based Nobel Peace Prize-winning group.
However, Snyder said that the low probability of Tehran’s targeting Israel’s military leadership is most likely a result of its lack of ability rather than desire. “I think it’s a capacity question,” she said. “If Iran could target Israel’s leadership, they would.”
A more realistic danger, Snyder said, is the threat a prolonged Middle East conflict could pose to global supply chains.
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