The Israel-Hamas war threatens Europe’s energy prices and should prevent the European Central Bank (ECB) from raising interest rates further, Yannas Stournaras, governor of Greece’s central bank, said in a Financial Times interview last week. 

“It is a question of common sense,” he said.

The Eurozone’s economy has reached “a critical point where if we continue to raise interest rates, we run the risk of something being broken,” he warned. “There is a lot of progress [in] inflation reduction [but] we are almost stagnant in Eurozone activity.” Banks have slashed lending, he noted.

The ECB’s governing council is widely expected to leave interest rates unchanged for the first time in 15 months when it meets in Athens this week.

Even past rate hawks are sounding a softer tone.

Klass Knot, the Netherlands’ central bank chief is “comfortable with the current stance of policy,” he told a recent conference. Boris Vujcic, governor of Croatia’s national bank, told that same conference that “what we are seeing now is a soft landing.”

With “a new source of uncertainty in the Middle East…it is better to keep all of our options open and be careful to retain the resilience of the European economy” instead of having “a knee-jerk reaction,” Stournaras added.

The war has nudged oil prices slightly higher, with Brent crude hovering in the low $90s per barrel.

“The Eurozone continues to be a large net energy importer,” he pointed out. The war “is likely to have a stagflationary impact” if prices continue to rise.

Also, Europe could see an influx of refugees from the war zone, he added. 

“If there is an exodus, we know that Europe and the European south is going to be the first stop,” which would create “a serious social and economic problem,” Stournaras said.

Some council members are urging the ECB to speed its process of paring back its massive bond portfolio that it built during the COVID War. “Bond hawks” are suggesting the bank stop buying bonds earlier than its planned date at the end of 2024.

However, those bond purchases “are the first line of defense” against diverging borrowing costs among Eurozone countries, Stournaras pointed out. Wide spreads in borrowing costs among countries in the zone disadvantages those that must pay higher interest rates on debt, such as Italy and Greece.

TREND FORECAST: Europe’s sluggish economy and high interest rates have forced Eurozone countries to lengthen what had been a 10-year plan to make a massive, rapid investment in renewable energy to replace what it has lost in oil and natural gas imports from Russia.

Meanwhile, OPEC+ will continue to keep oil prices as high as the market will bear, as we have explained in articles such as “OPEC+ Cuts Daily Oil Output Limit By Two Million Barrels” (11 Oct 2022) and  “OPEC+ Slashes Daily Oil Output Limit By 1.16 Million Barrels” (4 Apr 2023).

As a result, Europe will remain on the brink of an energy shortage through this winter. The continent’s gas storage facilities are full for the coming cold season and, as of now, temperatures are forecast to remain within seasonal norms. That indicates Europe could get through to next spring with no energy crisis.

That could allow the region to escape a portion of the damage caused by price spikes if Iran joins the Israel War or if the conflict escalates in other ways.