The Iran war and energy shocks exposed the vulnerability of the European economy

Source: Zhou Ziheng

Written by: Bian Gui Account

The Direct Impact of the Strait of Hormuz Closure

After Iran’s war enters a complex phase in 2026, its effects quickly extend from the regional to the global economic core. The Strait of Hormuz, as the world’s most critical chokepoint for oil transportation, sees about 100 ships passing daily, with oil tankers and natural gas carriers accounting for 60% to 70%. According to data from the International Energy Agency and the U.S. Energy Information Administration, this strait handles approximately 20% of global liquid petroleum consumption and about 25% of maritime oil trade. Before the conflict, the Gulf region’s daily output was about 27 million barrels, serving as a core part of the global daily demand of 104 to 106 million barrels.

After the ceasefire agreement was announced, shipping through the strait remained shut, with at least 800 ships stranded in the Arabian Gulf. The International Maritime Organization warned that imposing fees on transit ships would set a dangerous precedent, threatening the global maritime trade system. Europe explicitly rejected such “commercial piracy,” considering it a violation of the right of innocent passage under the United Nations Convention on the Law of the Sea (UNCLOS) of 1982. About 137 ships pass daily; if a transit fee of $2 million were levied, annual revenue would reach approximately $94 billion, equivalent to a quarter of Iran’s GDP, but ultimately the costs would be borne by global consumers.

Oil supply disruptions have intensified. Data from Kpler and Vortexa show that oil exports from Gulf countries decreased by 61% to 71% in March. Iraq experienced the largest decline, with significant drops also seen in Kuwait, Qatar, the UAE, and Bahrain. Saudi Arabia and the UAE were relatively less affected due to some alternative export channels. Global oil production in March fell by about 43% to 15.3 million barrels per day. The International Energy Agency reported that this supply disruption has had a greater impact on the global economy than pre-war expectations, with export declines directly pushing up energy prices.

Vulnerability of Europe’s Energy Import Structure

Europe has limited domestic energy resources, high extraction costs, and has long relied heavily on imports. The EU’s 2025 energy import value is 336.7 billion euros, equivalent to 104M tons. Oil imports dominate, with U.S. imports rising to 15.1%, Norway 14.4%, Kazakhstan 12.7%, and about 13% from the Middle East, mainly from Saudi Arabia and Iraq. Liquefied natural gas (LNG) imports are projected to grow by 24.4% year-on-year in 2025, with U.S. supplies accounting for 56%. Since Russia’s invasion of Ukraine, the EU has sharply reduced Russian natural gas imports from 150 billion cubic meters in 2021 to 41 billion cubic meters in 2025, and Russian crude oil imports have fallen from 27% to 3%.

However, the closure of the Strait of Hormuz has disrupted these diversification efforts. In the first quarter, the EU was forced to increase LNG imports from Russia to compensate for Middle Eastern shortages. This exposed the structural weaknesses in Europe’s energy security: dependence on imports combined with insufficient buffer capacity to withstand multiple geopolitical shocks. Over the past two decades, while the EU accelerated renewable energy deployment—especially solar and wind projects in Germany, Spain, and Nordic countries—it remains unable to fully replace fossil fuels in the short term. Spain, with large-scale renewable investments, has performed relatively well in controlling energy prices, with economic growth exceeding 2%. Conversely, countries like Italy face natural gas shortages due to the suspension of Qatar’s Ras Laffan gas field, prompting Italy’s prime minister to visit the Gulf region seeking alternative supplies.

Energy prices have surged by 40% to 70%, far exceeding economic tolerance. The Ifo Institute in Germany analyzed that this shock directly impacts energy-intensive industries such as automotive, chemicals, and aluminum. The EU’s energy and housing commissioner has called for increased use of public transportation and energy-saving driving, but short-term effects are limited.

Analysis of Major European Countries’ Economies

Germany’s economic recovery has been hindered. Pre-war GDP growth expectations were revised down from 1.2% to 0.6%, with the Middle East conflict further dampening industrial demand. The energy price shock is comparable to the impacts of COVID-19 and the Ukraine war. Expansionary fiscal policies have alleviated some slowdown but cannot fully offset the damage to manufacturing. Gasoline prices at Berlin gas stations have risen, highlighting pressure on daily life.

As one of the most affected industrialized countries in Northwest Europe, the UK’s inflation rate may rise from 2.5% to 4%. The Organization for Economic Co-operation and Development (OECD) has lowered the UK’s 2026 economic growth forecast from 1.1% to 0.7%. The fiscal year’s budget deficit is about 125.9 billion pounds, with borrowing needs in 2026-2027 expected to reach 250 billion pounds. High energy costs limit the Bank of England’s plans to cut interest rates to stimulate investment, directly negatively impacting consumers and mortgage holders.

France’s economic growth is expected to slow to 0.8% in 2026, below pre-war forecasts. The budget deficit exceeds 5.4%, and debt levels surpass 112%. Gasoline prices approach 3 euros per liter, with consumers bearing most of the costs. The middle class faces purchasing power threats. Paris Bank’s analysis suggests that the inflation environment caused by this new energy shock is lower than in 2022, and growth may slow further, but overall recovery will still be hindered.

Countries like Italy and Greece face different situations. Italy’s natural gas consumption, about 30%, depends on the affected gas fields, with economic growth only at 0.4%. Greece and Portugal, relying on tourism, services, and agriculture, have somewhat buffered food price increases. Norway, as a major oil and gas supplier, benefits from high energy prices and the strait disruption, maintaining a high standard of living. Rotterdam Port, Europe’s largest port, is affected by global trade fluctuations but maintains a high credit rating through trade with the U.S. Ireland, as a tech investment hub, remains relatively stable.

Inflationary Pressures and Recovery Outlook

According to Eurostat, the EU’s economy grew about 0.3% in Q4 2025, with the Eurozone at 0.4%. Based on an average growth rate of 1.5%, the GDP of the 27 member states is projected to reach €22.5 trillion by the end of 2026. However, the residual effects of the war have made Europe the slowest-growing among major industrialized regions, with an overall growth forecast of only 0.6% to 0.8%, with significant differences among countries.

The surge in energy costs is the main reason. Although Europe remains the world’s third-largest economy, its own production capacity is limited compared to China’s daily output of over 4 million barrels of oil. Spain has effectively stabilized prices through wind and solar projects, while Norway and the Netherlands mitigate shocks via trade and port advantages. Countries like the UK and Germany, with high energy dependence, face greater challenges.

Analysis by the International Monetary Fund and OECD shows that this shock propagates through energy prices, supply chains, and financial markets, with regional impacts varying significantly. Compared to the Ukraine war, Europe is relatively better prepared for this crisis, but global market volatility remains vulnerable. While inflation growth has slowed, persistent energy price increases continue to restrict investment and consumption.

Geopolitical and Long-term Energy Security Challenges

The Iran conflict highlights Europe’s geopolitical vulnerability in its economic model. Agreements between the U.S. and Iran could further undermine Europe’s efforts to recover from years of recession. European countries worry that Washington’s reconfiguration of the Middle East ignores European interests. Tensions within NATO have intensified, with some countries banning U.S. aircraft from bases, and trade and energy shocks widening transatlantic divisions.

Long-term, Europe needs to accelerate its energy transition. Increasing domestic renewable deployment, diversifying import channels, and strategic reserves are key. The EU Commission forecasts that achieving the goal of completely eliminating dependence on Russian energy by 2027 will face new challenges. The Middle Eastern supply disruptions have prompted Europe to reassess its energy security independence, balancing economic decisions amid a divided world.

European Response Strategies and International Impact

In response to the crisis, the EU calls for coordinated energy storage operations, following IEA recommendations, and promotes collective policy choices. The renewable energy experiences of Spain and Nordic countries offer lessons, while Norway’s high energy prices serve as a reminder of the importance of diversification. Post-Brexit, the UK’s independent response capacity is strong but more directly affected by global energy markets.

Globally, this event reshapes energy flow patterns. Asian markets bear most of the Strait of Hormuz’s oil flow, but Europe’s prospects for economic recovery are dim, dragging down global growth. Limited pipeline alternatives mean Saudi Arabia and the UAE can only divert part of their exports, unable to fully compensate for the strait’s closure. Strategic petroleum reserves provide short-term buffers, but Europe’s long-term reliance on imports calls for structural reforms.

The Iran conflict and energy shocks are not only short-term supply crises but also expose systemic vulnerabilities in Europe’s economy. Amid increasing geopolitical uncertainties, Europe must strengthen internal coordination, accelerate green transformation, and pursue diversified diplomacy to balance energy security and economic growth. Only through these measures can Europe rebuild economic resilience in a turbulent world.