European Bank for Reconstruction and Development warns Iran war could trigger major economic shock in Europe

If the war in Iran drags on, this will have a “serious impact” on the economy, especially in Europe, according to the head of a major regional development bank.

The warning comes amid preparations to ease state aid rules in the EU as a measure to help members deal with the energy crisis caused by the conflict in the Middle East.

EBRD chief expects economic shock if the war continues

The military clash in the Persian Gulf is surely going to curb growth and push inflation up, but the economic consequences of a prolonged war will be even “more serious.”

That’s according to the President of the European Bank for Reconstruction and Development, Odile Renaud-Basso, who commented on the matter for Euronews.

She also warned about a “much more serious economic impact” on the European Union, in case the U.S. and Israeli conflict with Iran drags on or escalates.

Her statements came after negotiations over the weekend between U.S. and Iranian officials failed to produce an agreement to end it.

Another round of talks may still take place before the two-week ceasefire expires on April 21, according to multiple media reports.

If these collapse, too, Renaud-Basso expects “wider and more significant” economic repercussions in the countries where the EBRD operates.

Founded in the early 1990’s to back the transition of former Eastern Bloc nations to a market economy, the bank now provides support in over 30 countries on three continents, including Asia and Africa.

The observed economic impacts are “directly related” to the surging energy rates, its head also told the European broadcaster.

The conflict, which started at the end of February, effectively closed the Strait of Hormuz, which accounted for about 20% of global oil and gas shipments.

Halted supplies through the waterway and strikes on energy infrastructure in Iran and the region sent fuel prices soaring in the following weeks, prompting states to intervene through subsidies and taxes.

$100 per barrel of oil to bump inflation by 1.5%

The EBRD estimates that if oil hovers around $100 per barrel, growth will shrink by 0.4% and inflation will rise by 1.5% in the countries where it’s active. Renaud-Basso elaborated:

“If the Strait of Hormuz remains blocked for a very long period of time, if there is more destruction of production capacities in the Gulf … then the economic impact is likely to be much more serious.”

Speaking for the Europe Today program on Monday, she also highlighted that the challenge for the EU will be even bigger as governments in the bloc are “much more limited” in fiscal terms.

That prevents them from taking measures to “counterweigh increases in energy prices” resulting from the Iran crisis, as they did during the COVID pandemic in 2019 or in 2022, when Russia invaded Ukraine.

The EBRD wants to allocate €5 billion for investments in nations from the region most affected by the conflict, from Egypt to Armenia, and is ready to support all other economies where it’s present.

EU to ease state aid rules amid rising energy costs

Meanwhile, the President of the European Commission, Ursula von der Leyen, revealed that the EU will propose easing state aid rules by the end of the month.

She made the announcement on Monday, after U.S. President Donald Trump’s threat on Sunday to block the Strait of Hormuz following the collapse of the negotiations with Iran.

Brussels’ move is part of a series of measures meant to help member states deal with the energy crisis sparked by the Gulf war, Politico’s European edition noted in a report.

The European Union’s energy bill has increased by €22 billion since the beginning of the war, von der Leyen also remarked in her statement.

Filling up gas storage facilities and adopting temporary tax cuts and demand measures are included in a special toolkit to be presented next week.

The bloc also intends to upgrade and expand its electricity network as a long-term solution to reduce dependence on expensive fossil fuel imports.

The plan also includes amending electricity taxes and grid charges, as well as updating the Union’s Emissions Trading System (ETS) as another response to the Iran war.

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