The next four weeks will determine whether the European economy faces a new crisis or merely a minor disruption on its path to recovery. This timeframe corresponds to the duration of the military action against Iran, which has resulted in the death of Iran's Supreme Leader Ayatollah Ali Khamenei, triggered a series of retaliatory attacks across the Middle East, and driven up energy costs.
Should the conflict persist longer, it risks undermining the eurozone's nascent economic recovery and rekindling inflationary pressures that the European Central Bank has been working to contain. According to Carsten Brzeski, an economist at ING Groep NV, the European Union's reliance on oil and gas from the Middle East makes it the "major economy most severely affected" by spillover effects from the Iran conflict.
Economists from Bloomberg Economics, Antonio Barroso and Simone De Lia, stated, "If the conflict is brief and energy prices rise only moderately, the impact will be manageable. However, a prolonged war keeping oil and gas prices elevated could force governments to increase spending to shield citizens from rising costs, while putting incumbent leaders under pressure."
The economic outlook for Europe had improved this year, with increased government spending in Germany and other nations expected to support modest economic expansion, while inflation rates largely align with the ECB's 2% target.
However, the escalation in Iran coincides with new confusion over U.S. tariff policy, following a Supreme Court decision related to initial tariffs imposed.
Markets are not yet panicking about the eurozone economy veering off course. Holger Schmieding, chief economist at Berenberg Bank, noted that even with Brent crude briefly surpassing $80 per barrel—which he described as a potential "short-term spike"—he would base his economic forecasts on an average Brent price assumption of $65-$70.
Schmieding said, "I expect efforts to be made to avoid a sustained surge in energy prices that could harm domestic support, especially since U.S. voters had already blamed him for high consumer prices prior to the strike on Iran."
Iran also has strong incentives to avoid excessive tension in the Strait of Hormuz, through which approximately one-fifth of the world's seaborne oil and gas passes.
Edoardo Campanella, an economist at UniCredit, commented, "China and Russia are the only major powers supporting Iran, and China, heavily reliant on this route for oil imports, will pressure Tehran not to endanger this vital passage."
According to Bloomberg Economics, "The military action against Iran and Tehran's retaliation have pushed oil prices from a pre-conflict average of $65 per barrel toward $80. A disruption to shipments through the Strait of Hormuz could drive prices above $100. European natural gas prices have also risen, with further upside risks if the conflict escalates. Our internal economic modeling suggests that major developed economies would face higher CPI and lower GDP, creating conflicting policy pressures for central banks."
ECB policymakers Gabriel Makhlouf and Martin Koch have stated it is too early to assess the economic impact of the recent attacks. However, Belgian central bank governor Pierre Wunsch outlined potential consequences if the conflict continues.
He said, "I would certainly not rush to react to energy price volatility. But if the conflict persists and energy prices rise more significantly, we will need to run models to evaluate the subsequent effects."
Wunsch noted that while the European economy might be impacted, rising commodity prices would ultimately push inflation higher. Indeed, traders have already reduced expectations for further ECB interest rate cuts this year.
Philip Lane, the ECB's chief economist, said the central bank "will monitor developments closely." He referenced staff simulations showing that an energy supply disruption from a Middle East war could trigger "a sharp spike in energy-driven inflation and a sharp decline in economic output."
The ECB is closely watching European natural gas prices, which surged by 54% after production was halted at major export facilities following drone attacks.
An energy shock is particularly ill-timed for Europe, where gas storage levels are unusually low, meaning significant liquefied natural gas imports will be needed this summer to prepare for next winter.
Morgan Stanley estimates that a permanent $10 per barrel increase in oil prices would raise eurozone inflation by 0.4 percentage points and reduce economic growth by 0.15 percentage points.
The ECB's latest projections show consumer price growth remaining below target until 2028, with economic growth accelerating from 1.2% in 2026 to 1.4% next year.
Currently, most institutions view the oil price increase as not a permanent adjustment.
Tobias Bass of Norddeutsche Landesbank noted, "Investors are cautious, betting on a relatively short-lived conflict." He pointed out that Germany's DAX index "remains focused on the key psychological level of 25,000."
Asset manager BlackRock holds a similar view. Karim Chedid, BlackRock's head of investment strategy for EMEA, said, "Markets and our clients see this as a volatility shock, not a supply shock—an important distinction. Overall, this is not a disruptive shock to inflation."
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