Lagarde on Iran War: Long-Term Economic Impact

European Central Bank President Christine Lagarde said during a virtual meeting of the Group of Seven that the economic repercussions of the war on Iran will not be short-term, in a direct response to estimates by US Treasury Secretary Scott Besent, who suggested that the effects of the conflict would be temporary.

Bloomberg quoted sources it described as familiar with the meeting, which included central bank governors and the finance and energy ministers of the group’s countries, that Lagarde stressed that the extent of the destruction that affected the energy infrastructure and supply chains makes it difficult to contain the shock within a short period, stressing that “much has already been destroyed and cannot be repaired within months.”

Estimates vary

While Besant downplayed the extent of the damage, considering that market disruptions, including the actual closure of the Strait of Hormuz, would remain temporary, Lagarde warned that the repercussions of the war extend beyond a passing shock, especially in light of the damage to the extraction, refining and distribution sectors.

This discrepancy reflects the widening gap between the United States and Europe in assessing economic risks, as European economies appear more exposed to rising energy prices and shipping disruptions, as a result of their heavy reliance on imports.

Inflationary pressures

Initial indicators show that the impact of the war has already begun to creep into the European economy, as inflation rates in the euro zone recorded the highest increase since 2022 in March, in parallel with the bloc’s governments lowering their growth expectations, amid fears that the recovery path will turn into a recession.

In this context, Lagarde warned in an interview with “The Economist” magazine that the world is facing “a real shock that may go beyond what is currently imaginable,” noting that the damage to the energy infrastructure makes restoring supplies to normal levels a time-complex process.

The European Central Bank’s hawkish scenario is based on the assumption that energy supply disruptions will continue until late 2026, which could push inflation to reach a peak of about 6.3%, if the damage worsens and supply chains continue to be disrupted.

On the other hand, Washington is betting on the markets’ ability to absorb the shock, with Besant confirming that the oil market still has sufficient supplies, and that the Strait of Hormuz may gradually reopen, allowing oil flows to return to normal.

International coordination

In an attempt to contain the repercussions, the G7 finance and energy ministers confirmed their readiness to take “all necessary measures” to ensure the stability of energy markets, including policy coordination and withdrawal from strategic reserves when necessary.

The meeting’s final statement stressed the importance of “coordinated international action” to limit the repercussions of the crisis on the global economy, in light of the increasing interconnectedness between energy markets and financial stability, and the widening scope of risks resulting from the continuation of the war.