Overview | Middle East Tensions Drive Up Energy Prices, European Economic Recovery Faces New Challenges

Xinhua News Agency Brussels, March 17 — Summary | Escalating Middle East Tensions Push Up Energy Prices, Europe’s Economic Recovery Faces New Challenges

Xinhua reporters Kang Yi and Ding Yinghua

The surge in energy prices caused by escalating Middle East tensions is delivering a new blow to Europe’s economy. After years of sluggish growth, Europe had hoped for a recovery this year, but rising oil and gas prices, limited fiscal space, and industrial pressures are adding more uncertainty to this outlook.

In response to the impact of rising energy prices, many European countries are seeking relief measures. However, compared to four years ago when the Russia-Ukraine conflict broke out, Europe’s policy space is now significantly narrower. At that time, government debt and borrowing costs were relatively low, and households and businesses still had financial buffers from pandemic stimulus policies.

Today, borrowing costs across many European countries continue to rise, with the UK and France’s government debt-to-GDP ratios at their highest or near-highest levels in at least 60 years. François Villeroy de Galhau, governor of the Bank of France, recently told media that “we have no more money.”

Following the Russia-Ukraine conflict, France implemented large-scale energy support measures from 2022 to 2023. According to data from the Organisation for Economic Co-operation and Development (OECD), France’s public debt reached a record €3.48 trillion by the third quarter of 2025, with a budget deficit expected to be 5.4% of GDP. Such large-scale subsidy policies are now difficult to implement again.

Rising energy prices may further accelerate the relocation of European industries. Energy-intensive sectors like chemicals face rising costs, prompting some companies to consider reducing capacity or shifting production to regions with lower energy costs.

EU Commission President von der Leyen recently stated that in the first ten days after the conflict erupted, rising oil and gas prices caused Europe to spend an additional approximately €3 billion on fossil fuel imports.

The impact of rising energy prices is also spreading to multiple sectors. For example, logistics and transportation costs have begun to increase. Meanwhile, agricultural production is under greater pressure. As prices for diesel and fertilizers rise, farms with already limited profit margins face further squeeze. Analysts believe this cost pressure could eventually push up food prices and intensify overall inflation.

Some European companies have started to lower their earnings forecasts. Swiss chocolate maker Lindt recently revised down its outlook for this year, partly due to uncertainties caused by Middle East tensions. German automaker Volkswagen also said that rising geopolitical risks could affect sales of its premium brands Porsche and Audi.

Analysts note that Europe’s economy is highly dependent on international trade, with the eurozone’s external trade volume approaching half of its annual economic output. The Iran situation is just the latest in a series of external shocks in recent years. Last year, the U.S. imposed tariffs on EU goods, restricting Europe’s access to key export markets and increasing global trade uncertainties.

Kavak Macro chief economist Neil Shearing said that with only about 1% economic growth, if international oil prices rise to $125 per barrel or higher, Europe could slip into recession.

Goldman Sachs analysis also indicates that as a net importer of food and energy, the UK could be one of the most severely impacted economies. Under a “baseline scenario” with oil prices averaging $77 per barrel in 2026, UK economic growth is expected to fall from the previous forecast of 1.5% to about 1%.

Derek Schumacher, chief economist at KfW IPEX-Bank, pointed out that if the Strait of Hormuz is blocked for three months and international oil prices remain between $120 and $150 per barrel, Germany’s GDP could decline by nearly 0.5% next year under this “negative scenario.” (End)