Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / How the Iran War Is Reshaping Eurozone Energy Policy
Transcript
- Lucas: So the Iran war is now in its — what, third month? — and I think a lot of the conversation has been about oil prices, about the Strait of Hormuz, about what it means for the US. But quietly, it's reshaping the energy calculus in Europe in ways that we're only starting to see in the data. Luna: Meaning the pipeline diplomacy with Russia that's suddenly back on the table? Lucas: Exactly. Last week, Putin and Xi had those talks — they revived the stalled Power of Siberia 2 pipeline. Now that's a gas pipeline from Russia to China, not to Europe. But the signal is clear: Russia is desperate to redirect its energy exports east, and China is happy to take the discount. Luna: And that leaves Europe in a weird spot. Because on the one hand, you've got the old reflex — buy cheap Russian gas. On the other hand, the war in Ukraine basically killed that relationship. But now, with Iran disrupting global supply, the calculus is shifting again. Lucas: Right. Look at the numbers — the trade-weighted dollar index hit 119.3 as of mid-May, up from 118.67 a couple weeks prior. That dollar strength is partly safe-haven flows from the Iran conflict. And it's putting pressure on the euro, which slid to 1.16 per dollar from 1.17. Luna: A weaker euro makes imported energy more expensive, which feeds into inflation. And that's exactly what the ECB doesn't need right now. Lucas: Especially since eurozone inflation has been sticky in services — but energy is the wildcard. If oil and gas prices spike again because of Iran, the ECB's path to cutting rates gets a lot harder. Some of the hawks on the Governing Council are already pointing to the dollar rally and saying, look, imported inflation is coming back. Luna: But at the same time, the real GDP growth data for the eurozone — we're at just 2 percent annualized in Q1, which is up from 0.5 percent the previous quarter. So the recovery is fragile. The ECB has to balance that. Lucas: That's the tension. You've got growth picking up, but it's still below trend in many countries. Germany's export machine is already struggling with China demand slowing — and now energy costs could rise again. The Bundesbank has been warning about this. Luna: And then there's the uk gulf trade deal that was announced — 'monumental achievement' according to Bahrain's minister. That's another piece of the puzzle. The UK is trying to secure alternative energy supplies, but the eurozone doesn't have a coordinated approach yet. Lucas: It's fragmented. You've got France pushing nuclear, Germany doubling down on renewables, Italy and Spain looking at North African solar and LNG. But none of that is going to replace Russian gas volumes overnight. And the Iran war is making that urgency more acute. Luna: So where does that leave investors? I mean, European equities have had a decent run — VGK is up 1.5 percent in the last five days, EZU up almost 2. Those are broad eurozone ETFs. But is that sustainable if energy costs rise? Lucas: It depends on the sector. Energy stocks obviously benefit from higher oil prices. But the broader market — especially industrials, autos, chemicals — those are energy-intensive. If margins get squeezed, earnings revisions could start to come down. That's the risk the ECB is watching. Luna: And consumer sentiment in the US just hit a record low — that's from the Michigan survey last week. That's partly about Iran, partly about inflation. If the US consumer pulls back, that's bad for European exporters too. Lucas: Exactly. The US is still the eurozone's biggest export market outside the EU. So you've got this triple hit: weaker euro, higher energy costs, and potentially softer US demand. That's why I think the ECB is going to stay cautious even if headline inflation keeps drifting down. Luna: I want to come back to the pipeline thing for a second. The Putin-Xi deal — Power of Siberia 2 — that's not going to directly affect Europe, right? It's russia to china. But does it change the bargaining power for European buyers? Lucas: It does, because it gives Russia an alternative. Before the war, Europe was Russia's primary gas customer. Now, even if Europe wanted to go back to buying Russian gas — which politically it can't — Moscow has other options. That weakens Europe's negotiating position long-term. Luna: But in the short term, the Iran conflict is actually creating a kind of energy crisis deja vu. We saw it in 2022 after the Ukraine invasion, and now again. Renewables investment has picked up, but not enough. Lucas: No, it hasn't. The IEA projected global renewable capacity additions would grow by another record this year, but that's off a low base. Europe is doing better than most — Germany installed something like 10 gigawatts of solar in Q1 alone. But the storage and grid infrastructure isn't there yet. Luna: So the Iran war is basically accelerating two trends simultaneously: the push for energy independence via renewables, and the realpolitik of keeping some fossil fuel ties open. It's messy. Lucas: It is messy. And the data reflects that — the nominal GDP of the eurozone is up, but real GDP growth is still quite modest. The currency moves, the trade flows, the inflation expectations — they're all telling the same story: the eurozone is caught between geopolitics and its own structural transition. Luna: Before we wrap — you know, a lot of listeners tell us they really value this kind of deep dive, especially on topics that aren't getting the same attention in the mainstream news. And it's conversations like this that keep us going. Lucas: Yeah, and honestly, this show is ad-free and listener-supported. If you've gotten something out of walking through the European economy with us, even a couple of dollars a month makes a real difference. That's buy me a coffee dot com slash fexingo. Luna: It genuinely helps us keep digging into these angles. And we're grateful for every bit of support. Lucas: So, back to the big picture — the question I keep coming back to is: can the eurozone decouple from the geopolitics of energy? Or is it always going to be a shock absorber for conflicts it doesn't start? Luna: I think the next twelve months will tell us. If the Iran conflict de-escalates, we might see a reprieve. But if it drags on, the structural weaknesses in Europe's energy setup will become harder to ignore. Lucas: And the ECB will have to navigate that very carefully — because raising rates to fight imported inflation could choke off the fragile recovery we're seeing. It's a tough spot. Luna: Well, we'll be watching the data and keeping you posted. Thanks for listening, everyone.