Israel-Hamas Conflict Escalates Economic Threats to Eurozone, Warns Goldman Sachs

The ongoing conflict between Israel and Hamas, which escalated after Hamas’s attack on Israel on October 7, is posing significant economic risks to the Eurozone, as reported by Goldman Sachs. Katya Vashkinskaya, an economist specializing in European affairs at the firm, pointed out potential threats such as reduced regional trade and tighter financial conditions that can negatively impact consumer confidence.

The conflict has already had a notable impact on oil and gas markets, with prices increasing by approximately 9% and 34%, respectively. A sustained 10% rise in oil prices could lead to a reduction of 0.2% in real GDP for the Euro area after one year and a near 0.3 percentage point rise in consumer prices. Concerns about these developments have been echoed by Bank of England Governor Andrew Bailey and the World Bank, both of which have cautioned that oil prices could exceed $150 a barrel if tensions continue to escalate.

Although there has been some stabilization in prices recently, a global decline in LNG (liquefied natural gas) exports is contributing to a rise in European prices. Vashkinskaya notes that energy cost support measures could help mitigate some of these effects.

Furthermore, the conflict jeopardizes consumer confidence, as evidenced by its decline following Russia’s invasion of Ukraine in March 2022 and the heightened levels of uncertainty related to the conflict observed in October.

While the Eurozone’s direct economic ties to the Middle East are limited (accounting for just 0.4% of the Euro area’s GDP), the broader impacts—including potential disruptions in oil and gas markets, elevated interest rates in both the Eurozone and the UK, and diminished regional trade—could significantly affect the European economy.