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The conflict in the Persian Gulf between Iran, Israel, and the United States, as well as a handful of countries struck as collateral damage has been going on and off for more than 2 months now. And in that time, countries from Europe have been almost completely absent from the theater. In the first wave of retaliatory strikes by Iran, a French air base was hit. And in an extremely limited capacity, the UK is providing some air defenses with the official line being that this is to defend British citizens in the region, as it is a popular transit and holiday hub, as well as being home to a lot of expatriots. However, outside of these narrow examples, the language coming from Europe leadership has overwhelmingly been that this is not their war. They
won't be deploying their militaries to fight Iran. They were not involved in the initial or ongoing strikes. And by reading between the lines a bit, it's fairly clear that they aren't supporting the war either through direct assistance or even in principle. That however does not mean that this conflict is not going to impact them economically. In fact, in many ways, they are more exposed to the fallout of this conflict than the USA itself. Despite their political distance, and perhaps crucially, not having a seat at the negotiating table, Europe has already been dealing with ongoing economic stagnation on top of energy shocks stemming from the conflict in Russia. All already hitting an
economy that is still highly industrial and far more dependent on energy imports. Now, while a lot of attention has been paid to Hormuz, this conflict also threatens to tighten transits of the Suez Canal, the main shipping artery linking Europe to the markets of Asia. Something that could have far greater and longerlasting consequences than just making the latest iPhone a little bit more expensive. Having all of these problems everywhere all at once makes for a difficult situation, even in the best of times. And yet, here they are. The supply shock from the east is playing out at the very same time that Europe is trying to rebalance trade in the West, pushing back against inconsistent tariffs from their largest
trading partner of all, the United States. So, what are the additional headwinds that are going to hit Europe the longer this conflict goes on? What makes Europe particularly exposed to these challenges? And finally, are there any practical economic solutions to weathering this storm? We all know wealth is built with consistent habits over time, but actually showing up and taking the steps each day is much easier said than done. That's exactly why I use Trading 212. With their auto invest feature, I don't have to rely on discipline or memory. Each month, a set amount that I decided gets invested automatically. But their platform does much more than that. They also have an automatic rebalancing
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will grant you a free fractional share to get started. Now, to understand why Europe is so exposed to this particular conflict, you really need to understand the role that energy plays in the European economy because it is perhaps the single biggest vulnerability the continent has. The EU as a whole imports 57% of its energy needs according to Euroat. And while that number has actually come down slightly thanks to renewable energy investments, it still means that the majority of the energy powering European homes, factories, and transport is coming from somewhere else. As a point of comparison, the USA imports just 17% of its energy needs and is currently the largest oil producer in
the world, which puts it in a fundamentally different position when global energy markets are disrupted. This is also an EUwide average where certain countries are even more energy dependent individually. Countries like Italy, Spain, and particularly Germany have historically relied on enormous quantities of imported fossil fuels to keep their economies running. The vast majority of these energy imports come from fossil fuels. However, it is worth noting that only a small share of these fossil fuels actually come from the Gulf. The majority actually comes from Norway, a major energy producer which is not a member of the EU, but is a very close partner and increasingly from the United States, which as of 2025 became
the single largest supplier of fossil fuels to the EU for the first time, providing around 19% of total imports. In the past, Russia was also a major energy provider, but the war in Ukraine has largely cut that off, either indirectly through sanctions or directly through infrastructure loss like Nordstream. So, the good news is that Europe isn't getting all of its oil from the Gulf. The bad news is that in terms of pricing, this doesn't really matter. Oil is a globally traded commodity and all importers are bidding for the same limited supply. When roughly 20 million barrels per day that used to flow through the straight of Hormuz get taken off the market or significantly
restricted, that drives up the price for everybody, including countries that never bought a single barrel from the Gulf in the first place. That's because oil isn't like buying fruit from a local market, where if one farm has a bad season, you just buy from the farm down the road at the same price. It's more like a global auction where every buyer on Earth is competing for the same pool and if that pool suddenly gets a lot smaller, the price goes up for everyone standing around it. Europe is a largely wealthy and highly energy dependent region doesn't have much to push back against these costs with. It needs the energy. It can't produce enough domestically and so it's going to pay whatever the market demands. There is
also the logistics of getting energy into the right place now that Russia and the Gulf have both been disrupted. That is a large share of Europe's typical supply being cut off, putting significantly more pressure on the sources that remain. In theory, this shouldn't matter. Other providers like Norway and the United States can increase their supply to fill in the shortage. And yes, Europe would be paying higher prices, but that's a global problem, not a specifically European one. The problem specific to Europe is actually physically getting that energy to where it needs to go. It's not as simple as just taking the plants that used to process Russian gas and then using them to take in American gas instead or making ports that used to
receive Gulf oil start handling Norwegian crude. Different grades and categories of fossil fuels require different processing infrastructure. A refinery set up to handle heavy Gulf crude can't just switch to light American shale oil without significant retooling. And that kind of industrial change takes years, not months. Beyond the technicalities, there is just the straight logistics of where these processing centers are located across the continent. A lot of them were built where they were, specifically because of their proximity to Russian or Middle Eastern supply routes. These centers are also spread out across different countries, so internal coordination between these systems has never been
great at the best of times. But these continual supply disruptions have rattled an already very delicate system. Germany has made this worse by decommissioning its nuclear power plants, shutting down its last three reactors in April 2023. that clean, stable, domestically produced power is simply gone from the grid at a time when every kilowatt matters. Europe is actually having a serious conversation about reversing course on nuclear with the European Commission unveiling a strategy for small modular reactors and projecting that EU nuclear capacity could grow from the current 98 gawatt to around 109 gaw by 2050 with the nuclear industry itself pushing for as much as 150 gaw. But even the most optimistic
version of that timeline is measured in decades, which doesn't help much when the problem is right now. Now, all of this energy disruption would be bad enough on its own, but it becomes a much bigger deal when you consider that Europe is still quite industrial. A larger share of European GDP comes from manufacturing than it does in the USA, around 15% compared to roughly 11%. And that gap gets even wider when you look at manufacturing as a share of total business activity, where Europe is closer to 23%. Either way, manufacturing is significantly more energyintensive than other industries like banking or technology that make up the difference in America. AI data centers are doing their best to close that energy
efficiency gap on the American side. But broadly speaking, the type of economic output that Europe produces just requires more energy per dollar of output than what the USA produces. This means higher oil and gas prices don't just make European electricity bills more expensive. They directly increase the cost of making the things that European economies actually sell to the rest of the world. Which means European manufacturers are now less competitive against rivals in countries where energy is cheaper, which means they sell less abroad, which means growth slows, which means tax revenues drop, which means governments have less to spend on the programs that are supposed to support
the people being hurt by all of this. It's a cascade that starts with the price of a barrel of oil, and ends with real consequences for everyday people. European manufacturers have already been struggling for years. The energy price shock from the war in Ukraine hit them hard. And just as costs were starting to normalize, this conflict is sending them right back up again. European industry has also been fighting a losing battle with Chinese manufacturers who are meeting or in many cases exceeding their technical abilities in even extremely high-end manufacturing fields that Western Europe has typically dominated.
German car companies used to compete essentially with each other and with Japan. They are now competing with Chinese electric vehicle manufacturers that can produce comparable or arguably better vehicles at a fraction of the cost. And that competitive pressure was already a serious concern before energy prices started climbing again. Outside of just the input costs, there are the shipping costs that come along with producing industrial goods rather than adding value through services. A piece of software can be sold around the world for practically nothing in delivery costs. When compared to a car or a machine tool, far more energy is spent just on delivery, and that delivery just
got a lot more expensive. European industry has also been hit by the fact that a lot of these manufactured goods are for export, not domestic consumption. Trade with the USA is difficult because of continued uncertainty around tariffs. The EU has already had to prepare countermeasures against American steel and aluminium tariffs and has drawn up a list of around 4,800 types of American exports it could hit in retaliation worth roughly $18 billion. That kind of tit for tat creates enormous uncertainty for European manufacturers who rely on the American market. Businesses can handle higher costs. They can even handle tariffs. What they can't handle is not knowing what the rules are going to be
next month. And then markets in Asia are harder to access than ever with shipping restricted around the Gulf. To make matters worse, this conflict is also restricting the supply of component parts coming into Europe from Asia, which are used as inputs into EU manufacturing. It's not just about getting European goods out. It's also about getting the things European factories need to make those goods in. Markets in Asia and America can bypass this disrupted region altogether and trade over the Pacific Ocean. Europe doesn't have that luxury. It's geographically stuck between two disrupted trade routes to the east and a tariff wall to the west. The seue is not
as blocked as Hormuz is, but shipping insurance is still at a premium in the area, not to mention heightened direct dangers in the Red Sea as navies and global attention are focused on the Persian Gulf. Iran has even threatened to close the Babel Mandeb Strait, which connects the Red Sea to the Gulf of Aiden. And if that were to happen on top of the Hormuz disruption, roughly a quarter of the world's energy and a significant chunk of Asia's exports to Europe would be blocked simultaneously. It's also worth mentioning that Europe is a major global shipping hub in its own right. Three of the largest container shipping companies in the world are headquartered in Europe. MSC is based in Geneva, MK is based in
Copenhagen and CMACGM is based in Marilles. Between them, they control a substantial share of global container shipping capacity. Shipping is an infamously global industry largely by its nature. The ships will be registered in Panama. The crews will be from the Philippines and they will be hauling cargo from China. But the headquarters back in Europe still bring in profits, still employ people, and they also take on a lot of the financial risk. When shipping insurance premiums spike because of conflict zones, when routes have to be diverted, adding weeks and fuel costs to every voyage, and when cargo volumes drop because trade is being disrupted, those costs ultimately
show up on European balance sheets. Some of these companies will see short-term revenue increases because higher shipping rates mean higher revenue per container. But that comes with higher costs and higher risk. And in the longer term, reduced trade volumes are bad for everybody in the shipping business. This isn't going to the EU by itself, but it's certainly not helping a major economic sector that typically manages to avoid these kinds of regional issues by virtue of being well global. But perhaps the most concerning part of all of this is the broader economic context that it's happening in. Because Europe was already in trouble before any of this started. European economies are
already sluggish. GDP growth across the EU is barely above 1% with the European Commission projecting just 1.3% growth for the Euro zone in 2025 and 1.2% in 2026. To put that in perspective, the US economy grew by 2.8% in 2024 and around 2.2% in 2025. Even at its slower pace, that is still roughly double the European growth, which means Europe is running into these headwinds with a lot less momentum. Germany, traditionally the engine of European economic growth, recorded growth of just 0.2% in 2025. France and Italy aren't doing much better, both stuck below 1%, weighed down by weak domestic demand and political instability. Businesses have been struggling. support programs are being stretched and inflation while it
has come down from its pandemic peaks is still eating into household budgets that haven't recovered from the years where it was far higher than it should have been. Even though headline inflation across the Euro zone has come down to around 2% that doesn't reverse the cumulative damage of the years where it was running at 6 8 or even 10% in some countries. Prices don't go back down just because the rate of increase slows. A supply shock like this can be absorbed, but it helps when the economy is already in fighting shape rather than recovering from what has effectively been two decades of rolling crisis. The 2008 financial crisis, the European debt
crisis, the pandemic, the energy shock from the war in Ukraine, and now this. European economies have barely had time to recover from one hit before the next one arrives. Each successive shock lands on a body that is a little bit more bruised than it was the last time. And because the recovery periods between these crises have been so short, the structural reforms that would have made Europe more resilient to this exact kind of shock, things like better energy infrastructure, more diversified trade, and stronger fiscal positions have never really been completed before the next emergency forces governments back into crisis management mode. The European Union is also not a monolith. It is
still a collection of constituent states that will be impacted by this to different levels and will have different levels of urgency to deal with it. A country like Poland, which has been investing heavily in energy diversification and has less exposure to Gulf shipping routes, is going to experience this differently to a country like Italy, which is heavily dependent on imported energy and Mediterranean shipping lanes. This makes a coordinated EUwide response difficult because you need to get 27 countries to agree on priorities when the problem is affecting each of them in fundamentally different ways. On top of all of this, European governments are simultaneously trying to ramp up defense spending with EU
military budgets reaching €381 billion in 2025 and projected to climb toward 400 billion in 2026 as the continent embarks on what is essentially a long-term rearmment program in response to the ongoing situation in Ukraine. That is money that needs to come from somewhere. And many of these governments are already indebted and cashstrapped with numerous competing priorities. maintaining welfare programs, investing in the energy transition, keeping businesses afloat through subsidies, and now absorbing an external economic shock from a war they want nothing to do with.
Something has to give. And usually what gives first is long-term investment, which is exactly what Europe needs more of right now, not less. So then, are there any practical solutions? Well, in the short term, honestly, not many good ones. Europe can't magically produce more domestic energy overnight. It can't reroute global shipping lanes and it can't force a resolution to a conflict it has deliberately stayed out of. What it can do and what it has been doing is accelerate the transition towards renewable energy. Renewables now generate nearly 47% of Europe's electricity, which is actually quite impressive and puts Europe well ahead of most other major economies on this front. But the problem is that the
remaining energy that the continent still depends on is overwhelmingly oil and gas. And those are the exact commodities being disrupted right now. Building more wind farms and solar panels is absolutely the right long-term strategy, but it doesn't help a German factory that needs natural gas today to keep its furnaces running. You can't power a steel mill with a solar panel, at least not yet. The nuclear conversation is promising, but even the most optimistic projections for new reactor capacity are measured in years and decades, not the months that would actually make a difference right now. In the medium-term, the most practical
thing Europe can do is deepen its energy partnerships with reliable suppliers, particularly Norway and the United States, and continue building out the infrastructure to actually receive and distribute that energy efficiently across the continent. Part of the reason that these supply disruptions hit so hard is that Europe's internal energy market is still surprisingly fragmented. Getting gas from a terminal in Spain to a factory in Germany involves crossing multiple national systems that weren't designed to work together seamlessly.
The EU knows this. It has been pushing for better interconnection for years, but progress has been slow because each country has its own energy priorities and its own political constraints around energy policy. Diversifying trade relationships is another obvious step. Reducing dependence on any single route or partner is something the EU has been talking about for years, but which tends to get a lot more urgent every time a crisis like this demonstrates just how vulnerable concentrated trade dependencies really are. And perhaps most importantly, European governments need to resist the temptation to turn inward. The instinct during a supply shock is to protect domestic industries through subsidies, price controls, and
trade barriers. But the European experience with Russian gas has already demonstrated that short-term interventions tend to distort markets and delay the adjustments that the economy actually needs to make. The uncomfortable reality is that Europe is going to take an economic hit from this conflict regardless of what it does. The question is whether that hit is managed in a way that leaves the economy in a stronger position once the dust settles or whether short-term political decisions make the underlying structural problems even worse. Altogether, this isn't going to be great for anybody. But Europe really is first in line to catch stray in a war they want nothing to do with. There are some countries, on the
other hand, that are making the best out of a bad situation. Russia and China are also going to be hurt by global supply chain disruptions, but they both have the benefit of at least being able to sell the solution. We've already made an entire video on those dynamics, so we didn't want to repeat too much here. But if you are interested, you should be able to click to that on your screen now. Thanks for watching, mate. Bye.
