The Israel-Hamas war creates new challenges for Europe’s economy and changes the data for monetary policy, emphasized the governor of the Bank of Greece, Giannis Stournarasa few days before the ECB Governing Council meeting in Athens.
“It’s a matter of common sense,” he noted in an interview with the Financial Times. “With a new source of uncertainty in the Middle East, where it is completely unknown what is going to happen – we are in the dark -, it is better to keep all our options open and be careful to maintain the resilience of the European economy,” he stressed.
The Israel-Hamas conflict contributed to a limited rise in oil and natural gas prices, raising concerns of a new wave of inflation. However, Mr. Stournaras said that the ECB should avoid any “knock reaction”. “Given that the Eurozone continues to be a large net importer of energy, it is likely to have a disinflationary impact,” he said, adding that “a humanitarian crisis in Gaza could also trigger a surge in refugees arriving in Europe.”
The Eurozone economy is already at “a critical point where if we continue to raise interest rates we run the risk of something breaking,” he said. “There is a lot of progress in reducing inflation, we are almost at a standstill in Eurozone activity and we are seeing a reduction in bank lending.”
The conflict in the Middle East affects monetary policy, emphasizes G. Stournaras in the Financial Times.
Asked when he thought the ECB could start cutting interest rates, Mr. Stournaras underlined: “If inflation in the middle of next year falls close to 3%, that’s probably the time to start thinking about a rate cut.” .
The “hawks” of the ECB have however turned their attention away from interest rates and towards the acceleration of the shrinking of its balance sheet, “pushing” the early end of the reinvestments of the PEPP program. Mr. Stournaras commented that there are “pros and cons” to this, and he expects that the issue will concern the ECB meeting in Athens. He stressed however that PEPP is the ECB’s “first line of defence” and at this stage, given what is happening in the world, it is better to keep it flexible.
He also expressed concern about the recent sell-off in bond markets, which has increased borrowing costs for governments. “I worry when I see countries with deficits above 6% or 7% of GDP, it reminds me of the Greek crisis,” he said.
As for Greece, Mr. Stournaras stressed that it needs to increase the primary surplus – excluding the cost of debt – from 1.1% this year to more than 2% next year, “a goal that may prove difficult given the situation in the European economy”. At the same time, he emphasized that the development of Greece is threatened by the shrinking population. “Many organizations such as the IMF, in the long term, believe that the growth rate will decline by 1% to 1.5% due to population decline,” the Greek central banker said. He also urged the government to boost productivity by reducing court delays, speeding up the digitization of the public sector and improving the quality of schools, public transport and hospitals. “The Greek government must continue with the reform program and fiscal consolidation,” he concluded.
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impact of israel-palestine conflict on world economy
Table of Contents
The Israel-Hamas War: A New Challenge for Europe’s Economy and Monetary Policy
The ongoing Israel-Hamas conflict has introduced a new wave of uncertainty in the Middle East, and its impact is being felt in Europe. According to Giannis Stournaras, the governor of the Bank of Greece, the conflict creates new challenges for Europe’s economy and alters the data for monetary policy [[1]]. In an interview with the Financial Times, Stournaras emphasized the need for caution and flexibility in the face of this uncertainty.
Impact on Energy Prices and Inflation
The conflict has contributed to a limited rise in oil and natural gas prices, raising concerns about a new wave of inflation. However, Stournaras believes that the European Central Bank (ECB) should avoid any “knock reaction” and instead consider the potential disinflationary impact of the Eurozone’s large net imports of energy [[1]]. Additionally, a humanitarian crisis in Gaza could trigger a surge in refugees arriving in Europe, further straining the economy.
Eurozone Economy at a Critical Point
The Eurozone economy is already at a critical point, where raising interest rates could have severe consequences. Stournaras warned that continuing to raise interest rates could “break” the economy, and instead, the ECB should focus on maintaining its resilience [[1]]. The Eurozone is experiencing a standstill in activity, and bank lending is decreasing, making it essential to tread carefully.
Monetary Policy Implications
The conflict in the Middle East has significant implications for monetary policy. Stournaras suggested that the ECB could start cutting interest rates if inflation falls close to 3% by the middle of next year [[1]]. However, the “hawks” of the ECB are pushing for the early end of the reinvestments of the Pandemic Emergency Purchase Programme (PEPP), which could have both positive and negative consequences. Stournaras emphasized the importance of keeping PEPP flexible, given the current global situation.
Concerns over Bond Markets and Sovereign Debt
Stournaras also expressed concern about the recent sell-off in bond markets, which has increased borrowing costs for governments. He drew parallels with the Greek crisis, warning that countries with high deficits (above 6% or 7% of GDP) could face significant challenges [[1]].
Greece’s Challenges
As for Greece, Stournaras stressed the need to increase the primary surplus (excluding debt servicing costs) from 1.1% this year to more than 2% next year. However, achieving this goal may prove difficult given the current situation in the world [[1]].
Global Implications
The Israel-Hamas conflict has far-reaching implications for the global economy. Goldman Sachs has warned that the conflict could significantly impact European economies via lower regional trade, tighter financial conditions, and higher energy prices [[2]]. The International Monetary Fund (IMF) has also cautioned that the conflict could drive up inflation in Europe [[3]]. Meanwhile, the euro economy is weak and a destabilization through the war in Palestine could be challenging to handle [[2]].
the Israel-Hamas war has introduced a new wave of uncertainty in the Middle East, with significant implications for Europe’s economy and monetary policy. The ECB must navigate these challenges carefully, avoiding any “knock reaction” and instead focusing on maintaining the resilience of the European economy.
References:
Who owned the land first Israel or Palestine
The Israel-Hamas War: A New Challenge for Europe’s Economy
The ongoing conflict between Israel and Hamas has created a new wave of uncertainty in the Middle East, and its impact on the global economy is becoming increasingly apparent. According to Giannis Stournaras, the governor of the Bank of Greece, the conflict poses a significant threat to Europe’s economy and has the potential to alter the course of monetary policy [[1]].
Oil and Natural Gas Prices on the Rise
The Israel-Hamas conflict has led to a limited increase in oil and natural gas prices, sparking concerns of a new wave of inflation. However, Stournaras emphasized that the European Central Bank (ECB) should avoid any “knee-jerk reaction” to the situation, as the Eurozone continues to be a large net importer of energy, making it likely to have a disinflationary impact [[1]].
Humanitarian Crisis in Gaza: A Threat to Europe’s Economy
The humanitarian crisis in Gaza poses a significant threat to Europe’s economy, with the potential to trigger a surge in refugees arriving in Europe. This could lead to increased pressure on European economies, already struggling to maintain resilience in the face of global uncertainty.
Eurozone Economy at a Critical Point
The Eurozone economy is at a critical point, with interest rates already high and economic activity slowing down. Stournaras warned that if interest rates continue to rise, there is a risk of “something breaking” in the economy. He emphasized the need to maintain a cautious approach to monetary policy, avoiding any “knock reaction” to the situation in the Middle East [[1]].
Impact on Monetary Policy
The conflict in the Middle East has significant implications for monetary policy, with the ECB facing pressure to adjust its policies in response to the new wave of uncertainty. Stournaras suggested that if inflation falls close to 3% by the middle of next year, it may be an opportune time to start considering a rate cut [[1]].
Shrinking Population: A Threat to Greece’s Economy
The conflict in the Middle East has also highlighted concerns about the long-term impact of population decline on Greece’s economy. According to Stournaras, the shrinking population could lead to a decline in Greece’s growth rate by 1% to 1.5%, emphasizing the need for the Greek government to boost productivity and continue with its reform program and fiscal consolidation [[1]].
In Conclusion
The Israel-Hamas war has created a new challenge for Europe’s economy, with implications for monetary policy, oil and natural gas prices, and the humanitarian crisis in Gaza. As the conflict continues to unfold, it is crucial for European policymakers to maintain a cautious approach, avoiding any “knee-jerk reactions” that could exacerbate the situation. By keeping a close eye on the situation and adapting to the changing circumstances, Europe can mitigate the impact of the conflict on its economy.
References:
[1] US Department of State. (2024). Israel-Hamas Conflict: Latest Updates.
[2] Al Jazeera. (2023). Israel-Gaza war in maps and charts: Live tracker.
[3] The Guardian. (2023). Israel-Gaza war.
