Impacts of Israeli war in Gaza on euro economy: What do we know so far?

Jana Treffler, Monday 13 Nov 2023

Europe’s economy is weak and a destabilization through the war in Palestine could be hard to handle. Although impact remains limited, even Germany, the continent’s biggest economy, is facing recession.

Euro bank note
The impact of the Gaza War on the European economy depends on how the conflict develops. Karolina Grabowska/Pexels


Soon after the Israeli war on Gaza began, economists started asking what impact this war would have on regional economies. In Europe, memories of the 1973 oil crises were evoked, when Arab states limited their oil exports to countries supporting Israel. Images of car-free highways are still in Europeans’ collective memory.

One month into the war on Gaza, analysts judge the current situation differently and do not expect major economic consequences for Europe; that is if the war is contained and the escalation is curtailed.

Inflation slowing down despite war

In the eurozone, inflation dropped to 2.9 percent in October, the European Statistical Office (Eurostat) estimated. Inflation in Germany has slowed down to 3-3.8 percent in October, depending on the calculation method, with an expected overall average of 6.1 for 2023, going down to 2.6 percent in 2024.

The cause of the current inflation in Europe is disruptions in trade. The Ukraine war and Western countries’ sanctions against Russia play a role. Also, the Covid pandemic has prolonged and deeper-than-expected effects, says Bassem Snaije, a consultant and economist at Paris Sciences Po, adding “This inflation is not a function of the oil price.” Snaije also points to the fact that oil price increases can but do not automatically lead to inflation.

The question of oil and gas prices

So far, oil prices have not increased worryingly. “Recently we have even seen a slight relaxation of the oil prices,” observes Guido Baldi from the German Institute of Economic Research.

Crude oil prices have reached their lowest point since July with prices averaging $80/bbl.

“Oil prices depend on the oil demand,” explains Snaije. He sees the reason for the drop is the unclear demand for oil from China, which would be struggling with internal debt issues.

Prices of gas and liquid natural gas (LNG) saw a larger increase, but still not to the extent that would lead to drastic effects for European economies. Within Europe, Germany would be one of the most affected countries by the increasing oil prices or even shortages, as it is most dependent on the imports of fossil fuels.

While France is relying more on nuclear power, countries like the UK, the Netherlands, or Norway can tap their sources of fossil fuels. Also, Germany is still home to energy-intensive industries.

LNG imports from the Middle East

In response to the Ukraine war, the EU aimed at reducing its dependence on Russian gas and tried to diversify its energy supply, which it has done successfully, says Snaije. One part of this plan in Germany was a deal with Qatar on LNG imports.

Given Qatar’s close ties to Hamas, this deal could be at risk because of the current war, as political economist Sabine Hofmann from Freie Universität Berlin notes. “US President Joe Biden could influence Germany to cancel the deal with Qatar as a funder of Hamas,” she said to Ahram Online.

Snaije disagreed: “The US put interest over morals and will not have a problem with this deal.” However, it could be exactly in the US’ interest to dissuade Germany from making the Qatar deal, Hofmann argued, as US companies could use the demand opportunity to export more fracking gas to Germany.

At the time being, LNG exports from Egypt to Europe have dropped as a result of the war.

“Egypt's LNG exports look set to remain low to zero over winter,” an analyst from the Oxford Institute for Energy Studies told Reuters.

According to Hofmann, an important question concerning gas amid this war is the gas reserves off the coast of the Gaza Strip that legally belong to Palestine. Snaije also noted that Europe’s turning away from Russia could increase already existing tensions around gas reserves in the East Mediterranean and risk future conflicts.

Employment: Massive lack of workforce

Western European countries and especially Germany are facing a major challenge as their populations are aging. Already they lack big numbers of skilled workers needed to maintain economic growth, health insurance, and retirement systems. Germany for instance needs 1.5 million immigrants per year (400,000 net) to maintain the workforce, and France two million per year to save retirement until 2050.

Therefore, Germany should uphold its so-called “Willkommenskultur,” which means a “welcoming culture” towards migrants, while immigration into the labor market should be encouraged, said Veronika Grimm, member of the German Council of Economic Experts, during the presentation of the council’s economic outlook report last week.

Migration flows and right-wing tendencies in Europe

The humanitarian crisis in the Gaza Strip has spurred warnings of potential refugee flows from Gaza to Europe. In this context, a migration deal with Egypt that was already on the EU’s agenda after having signed similar deals with Turkey and Tunisia might now be negotiated with increased priority.

A senior EU diplomat said to the US newspaper “Politico” that supporting Egypt would be crucial to stem migration departures from North Africa and address the potential flow of refugees fleeing from Gaza.

“In general, Europe and especially the German economy need immigration from other countries in the world,” Baldi warned. “In the end, it is a political decision, from which parts of the world immigration will come.” From an economic perspective, permeable borders are important for Europe’s economic stability, he said.

Recruitment programs of skilled workers, for example in the health sector, often led to brain drain and negative effects in the sending countries. Without the necessary workforce and with the increasing decline of European economies, competition for resources might intensify, which could further spur racism, Baldi added.

Right-wing parties and anti-migrant resentments have been on the rise in many European countries, leading to calls for stricter migration control. Germany’s Chancellor Olaf Scholz was recently cited on the cover of the news magazine “Der Spiegel,” saying “We will deport on a large scale,” referring to the reform on repatriations in Germany. Simultaneously, the reform of the common European asylum system (CEAS) is on the way, which human rights organizations criticize as a major cut in migrants’ rights.

The actual reasons for recession in Europe

For the whole eurozone, a recession of minus 0.1 percent has been calculated by Eurostat for the third quarter of 2023.

“The European economy is weak, and its biggest problem is Germany,” said Snaije.

Accordingly, the export-driven model of Europe’s strongest economy was ending as China, its biggest client, is not importing as much as before and might soon even make Germany’s car industry obsolete.

Currently, the German Council of Economic Experts expects an overall recession for the German economy of minus 0.4 percent, recovering to a modest growth of 0.7 percent in 2024. A most important factor for the shrinking economy is the demographic change and consequent lack of workforce, the council concluded.

Tenfold increase of German armament exports to Israel

Despite the recession, one sector is likely to grow in times of war, the armament industry.

In response to the Ukraine war, Germany has decided on a 100-billion-euro extra budget for its military, of which very little have been spent until now.

Meanwhile, armament companies like Rheinmetall have seen a rise in their share prices in the stock market after the beginning of the Gaza war. Armament exportation from Germany to Israel has increased tenfold this year, most of which has been approved by the federal government after 7 October.

However, this reflects only a change in sales, not an increase in production, said Snaije.

The war could have a greater impact on military innovations, particularly in the area of cybersecurity and the further development of drones.

Concerning tourism, the war has not impacted the European tourism industry, except for Europeans changing their travel plans from the Middle East to other destinations.

In conclusion, demographic change and a changing economic world order combined to make the European economy suffer much worse than what the war against Gaza did. In case of war escalation, a blockade of the Strait of Hormuz is seen as the biggest threat to the global and European economy. Third of the global oil supply must pass through the strait. However, it has never been closed, not even during the Gulf War.

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