The worst-case scenario for the euro will be realized in the event of a prolonged escalation in the Middle East with widespread energy disruptions affecting Europe. Investors will sell stocks and flee to safe havens such as the U.S. dollar, considered the number one crisis currency.
“Due to low economic growth, high debt and political divisions, the euro will come under pressure as capital flows into dollar investments,” economist Daniel Stelter warned for Euronews. ING Bank chief economist Carsten Brzeski is of the same opinion: “In this scenario, the dollar will rise first and the euro will fall further.”
How badly can the euro fall?
Experts estimate the loss of the euro’s value against the dollar at 5-8%. Such a fall could be the lowest level since the energy crisis of 2022/23. “In the worst case, in a panic phase, the euro could fall well below the lows of the 2022/23 energy crisis and this would trigger a recession,” admits Daniel Stelter. – Higher energy prices act as an additional tax, curbing consumption and investment. Even developed countries like Germany will slip into a deep recession, and the entire eurozone will slip into at least a technical recession”.
Stelter also warns of stagflation: “The combination of high inflation due to energy prices and a simultaneous decline in GDP will be a repetition, but in an amplified form, of what we have seen since 2022”.
The longer the blockade, the worse the consequences
As for stock markets, the expert predicts a sharp drop in profitability in energy-intensive sectors (chemical industry, metallurgy, automotive, machine building). European indices are likely to fall “much harder than the US markets”.
The more noticeable the economic damage, the more likely the market will take note of the structural weakness of the euro rather than just a short-term shock. This will create an imbalance in the interest rate and bond markets. The ECB will have to intervene more strongly in the market again to prevent a new debt crisis.
Even with a favorable euro exchange rate, exports could fall sharply due to falling demand. Rising energy prices are putting pressure, especially in energy-dependent countries such as China, India and the US. As a result, companies there are cutting costs, leading to fewer orders.
Doubts about the stability of the monetary system
The European Central Bank (ECB) may find itself in a difficult situation. It has a mandate to keep inflation at around 2% in the medium term.
If the war with Iran is short-lived, the ECB will cut interest rates to support the economy, which could boost investment and consumption. However, if it drags on, it will have to freeze or even raise them. In this case, the euro will remain under pressure. At the same time, the economy will lose momentum – in the worst case, there will be a threat of stagnation and recession. This will lead to capital outflow from Europe.
The problem will not arise if the conflict ends quickly
A rapid de-escalation of the conflict in the Middle East (we are talking about a timeframe of no more than 4-5 weeks) could return the euro to a somewhat more favorable exchange rate. But it is still unclear when and how the war in Iran will end. The Iranian authorities’ resistance to regime change could prolong the conflict for months.
Daniel Stelter emphasizes: “There are no problems if the conflict ends in a few weeks and critical energy infrastructure in Saudi Arabia and Qatar is not significantly damaged.”
