'Experts caution that the euro could decline if the conflict with Iran continues for an extended period.'

Impact of the Iran Conflict on Energy Prices and the Euro

Since late February, the ongoing conflict in Iran has sent shockwaves through global energy markets, causing significant increases in the prices of oil, gasoline, diesel, and natural gas.

These rising costs are straining both consumers and energy-reliant industries such as chemicals and steel, compounding the challenges already facing the German economy amid lackluster growth projections.

The euro, currently trading near $1.16, is also feeling the pressure. Should the conflict in Iran extend well beyond the four-week period suggested by the US president, the euro could face even steeper declines.

Economist Daniel Stelter cautions that the euro, already weakened by sluggish growth, mounting debt, and political disagreements, could see further depreciation as investors seek the safety of US dollar assets.

Carsten Brzeski, ING Bank’s chief economist, adds that in such circumstances, the dollar would likely strengthen while the euro continues to lose ground.

Daniel Stelter is regarded as one of Germany’s most prominent economic experts.

How Low Could the Euro Go?

If tensions in the Middle East escalate further and disrupt energy supplies to Europe, the euro could face a worst-case scenario.

During periods of uncertainty, investors often abandon equities in favor of safer assets like the US dollar. As demand for dollar-linked investments rises, the dollar appreciates and the euro weakens.

Brzeski notes that if the Strait of Hormuz remains blocked for several weeks, oil prices could surge past $100 per barrel. In this scenario, the euro might drop to around $1.10, or even lower.

Exchange rates could fall to between $1.10 and $1.12 per euro, representing a 5% to 8% decline in value against the dollar.

This depreciation would make travel to the US, as well as imported goods like oil, electronics, and raw materials, more expensive for Europeans.

Such a drop would mark the euro’s lowest point since the 2022-23 energy crisis triggered by the Ukraine conflict.

Brzeski explains that while this scenario may not guarantee a recession in Germany, it would significantly dampen the country’s budding economic recovery.

Stelter goes further, suggesting the euro could fall below the lows seen during the previous crisis, potentially dropping to between $0.90 and $0.95 per euro.

Potential for Recession: Germany’s Vulnerability

Stelter warns that Germany could face severe repercussions if the conflict drags on for months, especially if key infrastructure is damaged or blockades persist.

He explains that soaring energy prices act like an extra tax, reducing both consumer spending and business investment. This could push Germany, already struggling with industrial output, into a deep recession, while the broader eurozone could slip into at least a technical recession.

Profit margins in sectors like chemicals, steel, automotive, and engineering could collapse, and European stock indices may fall more sharply than their US counterparts.

The prevailing “energy in, industry out” model would come under renewed strain.

Stagflation—a combination of high inflation and stagnant growth—could trigger panic selling on the German DAX as investors rush to exit the market.

The Longer the Blockade, the Greater the Risks

An extended blockade could destabilize interest rates and bond markets across Europe.

Stelter suggests that the European Central Bank (ECB) might be forced to intervene more aggressively to prevent a new debt crisis.

He notes that while long-term yields could initially rise due to inflation fears, heavily indebted countries like France would face increasing pressure from higher risk premiums.

Extreme price spikes are possible if the situation escalates further, such as through attacks on tankers or damage to vital infrastructure.

Such an “energy black swan” event could lead to abrupt supply shortages or price surges, shaking the global economy.

Stelter warns that this could reignite debates over rationing, production halts, and relocating industries abroad.

Even with a weaker euro making exports theoretically more competitive, global demand could collapse as high energy prices weigh on economies worldwide, particularly in countries like China, India, and the US.

This would result in reduced spending by foreign businesses and fewer orders for German manufacturers.

Is Eurozone Stability at Stake?

The ECB faces a challenging situation. Its mandate is to keep inflation near 2% over the medium term.

If the Iran conflict is brief, the ECB could lower interest rates to stimulate the economy, making borrowing cheaper and encouraging investment and consumption.

However, if the war drags on and inflation returns, the ECB may be unable to cut rates and might even need to raise them, keeping the euro under pressure and risking economic stagnation or recession. This could also prompt capital outflows from Europe.

Stelter estimates that persistent high energy prices could push eurozone inflation up by at least one percentage point if they last for several months.

At the same time, economic growth would falter, creating a classic stagflation scenario.

Political pressure is mounting for the ECB to support highly indebted countries through low rates and bond purchases, which increases its role in indirect government financing—a trend Stelter has long highlighted.

He argues that such conflicts raise doubts about the long-term stability of the eurozone’s monetary system.

Could a Swift Resolution Save the Euro?

If the Iran conflict de-escalates quickly and lasts no more than four or five weeks, the euro could regain some stability. However, the timeline and outcome of the conflict remain highly uncertain.

Strong resistance within Iran and from its leadership could prolong the crisis for months.

Stelter concludes that if the conflict ends swiftly and critical energy infrastructure in Saudi Arabia and Qatar remains intact, the euro’s outlook would improve considerably.