The Government is making ready support to cushion the impression of the battle in Iran as a result of “it is already noticeable in the pockets” | Economy | EUROtoday

The battle within the Persian Gulf started simply over per week in the past and “it is already affecting the pockets of the Spanish people.” This leads the Government, defined the Minister of Economy, Carlos Body, to organize measures to cushion this impression, which is being seen, above all, within the costs of gasoline and diesel. For this motive, the pinnacle of the Economy has recommended that the primary support will attain skilled transport “because the increase in costs [en este sector]” is transferred to the rest of the products and ends up dragging inflation with it. Body has not given more details, justifying that “we must take into account the enormous volatility of the situation” in the raw materials markets.

This volatility that the Spanish minister speaks of has an explanation: the war has exploded in a key region of the world for energy supply. 20% of the oil and liquefied gas produced in the world passes through the Strait of Hormuz. These numbers help to clearly understand the nervousness in the markets or why the usually restrained Economy Commissioner, Valdis Dombrovskis, has left an explicit warning at the entrance of the Eurogroup, which had the analysis of the situation as a very prominent point on the agenda: “In a benign situation, during which the battle lasts two weeks, it might not have important penalties for the world and European financial system.”

But the situation will darken if it lasts longer: “If it is prolonged with disruptions to shipping in the Strait of Hormuz and with attacks on energy infrastructure in the Persian Gulf States, it could end up causing a major inflationary crisis in the global and European economy, with a rise in energy prices and the spread of widespread inflation and negative effects on confidence, supply chain disruptions and tighter financing conditions.”

“It is important to work to reduce the tension of the conflict as soon as possible,” claimed the Latvian politician, because as he pointed out at the end of the meeting, “persistent attacks against energy and transport infrastructure can expose the world economy to a long-term stagflation crisis.” Although he has asked to “keep a cool head” because it is still “too early to speculate on the specific political implications.”

The duration of the conflict, which is now in its second week, is a determining element in knowing what magnitude the economic blow will be. Both Dombrovskis and Corps have highlighted this. Only in the first few days is it beginning to be seen where the bombs, missiles and drones that now fall daily in the Middle East can drag the world economy into that “major inflationary crisis.” In Spain, for example, the liter of gasoline has risen by 15 cents in the first days of this war; that of diesel, the fuel used by transporters, 28 cents.

And it is not only noticeable at gas stations, it is also affecting the price of fertilizers and plastics, the Spanish minister has broken down. “From here on, as the President of the Government has pointed out, what the Spanish Government is going to do is protect citizens, companies and workers,” he continued.

To develop these protection plans, the Spanish Executive relies on “the lessons learned” in 2022, when Russia invaded Ukraine and the sources of natural gas supply for the European Union began to dry up and prices soared. Now the problem is different: there is not much risk in supply – for the moment – it is more about the impact of quotes. A barrel of Brent, the benchmark for crude oil in Europe, has exceeded $100 this Monday. The increase is very significant, although Corps has tried to contextualize it by pointing out that those 100 dollars in 2026 are equivalent to about 85 dollars in 2022.

“We are still far from the levels of the Ukrainian war“, Body has pointed out. Then gas was paid at 351 euros per MWh in Europe; This Monday it changed to 58 euros. But that is the mirror in which the Spanish Government looks – and to which many in the EU look – to think about the response in the form of policies and public aid that cushion the blow: “We are clear in regards to the measures that may be applied and we’re going to put them on the desk relying on how the scenario develops. We have already got this e book of classes discovered from Ukraine,” the minister indicated.

Nobody forgets what happened four years ago now: the boots of the Russian soldiers entered the neighboring country; Natural Gas prices –mainly– shot up to unusual levels; and inflation, hand in hand with very high energy prices, shot up to double digits. We had to go back to the 1970s, when another war in the Middle East caused what is known in history books as the Oil Crisis of 1973, which raised inflation well above 10%.

As Corp has identified, the present scenario remains to be very removed from that and there are various extra instruments accessible to governments to reply (strategic reserves haven’t but been used to attempt to appease the markets). But every day that passes with out stopping bombs falling complicates the scenario.