Trump initially said that the war in Iran would last four weeks. Later, he stated that it could go on much longer. If the conflict prolongs, economists warn that the euro could decrease, and renowned economist Daniel Stelter goes further and predicts a total recession.
The war in Iran has triggered an energy price shock and has affected oil, gasoline, diesel, and gas.
Higher costs for consumers and large energy-consuming industries, such as chemicals and steel, also put pressure on the German economy - which is already under strain.
The euro, currently valued at around 1.16 dollars, is also suffering. The European currency could be particularly affected if the scenario of the war in Iran lasting significantly more than four weeks materializes.
"An already weak euro due to high debt and political discord would be subject to additional pressure, as capital would move towards investments in dollars considered safe," said economist Daniel Stelter to Euronews.
Similarly, the Chief Economist at ING Bank, Carsten Brzeski, warns that "in such a scenario, the dollar would be the first to rise, and the euro would continue to fall."
How dangerous could the euro fall be
A pessimistic scenario for the euro would occur in the case of sustained regional escalation in the Middle East, with massive energy disruptions affecting Europe.
- Aviation kerosene price increased by over 70% this week
- Middle East war hits air cargo: global capacity down by over 20%
In crisis mode, investors are more likely to sell stocks and turn to "safe havens" like the US dollar. As more stocks are bought in dollars, it becomes more valuable, and the euro declines.
Brzeski told Euronews that "if the blockade of the Strait of Hormuz lasts for several weeks, the price of oil could rise to $100 per barrel or even higher. In such a scenario, the dollar would be the first to rise, and the euro would continue to fall. Probably around 1.10 dollars for one euro."
In this case, the euro-dollar exchange rate could drop between 1.10 and 1.12 dollars or even less. This would represent a significant loss of value against the dollar, approximately 5% to 8%.
A trip to the US, including hotels, flights, and shopping, would then become more expensive, and imported goods such as oil, electronics, and raw materials would consequently cost more when converted into euros.
A 5% to 8% decline in the coming weeks would be the lowest level since the energy crisis of 2022-2023, caused by the large-scale invasion of Ukraine.
This development "does not necessarily mean a recession" in Germany, "but this worst-case scenario would be a huge damper on the current growth trajectory," Brzeski explains.
Stelter even predicts an even deeper decline: "In the worst-case scenario, I think the euro could fall well below the lows of the 2022-2023 crisis and, at that time, temporarily below parity with the dollar, meaning a scenario of 0.90 to 0.95 dollars per euro."
Recession? Severe consequences for Germany
Economist Daniel Stelter, on the other hand, sees particularly severe consequences for Germany in a pessimistic scenario, such as a blockade lasting for several months, a prolonged war, and the destruction of crucial infrastructure.
"Higher energy prices act as an additional tax, reducing consumption and investments. Already weakly industrialized countries like Germany would fall deep into recession - the entire euro area would at least fall into a technical recession," Stelter explained.
Stelter predicts that profit margins in large energy-consuming sectors - chemicals, steel, automotive, and mechanical engineering - will collapse. European indices will likely drop "much more sharply than American markets."
The "energy in, industry out" business model would be subject to new pressures.
Stagflation - high inflation combined with weak growth - could trigger a wave of selling on the German DAX index as panicked investors rush to sell stocks simultaneously.
The longer the blockade, the more severe the consequences
A longer blockade would create an imbalance in interest rates and bond markets.
"Ultimately, the ECB would have to intervene more strongly in the market to prevent a new debt crisis," says Stelter.
This is because "long-term nominal yields could initially rise due to inflation concerns, but at the same time, stress among heavily indebted countries, including France, would increase due to rising risk premiums."
Even "extreme price increases" are possible, warns Stelter, in the case of escalations such as attacks on tankers or physical damage to infrastructure.
In the energy sector, an event known as an "energy black swan" would occur, with far-reaching consequences, such as sudden supply disruptions or price spikes that would shake the global economy.
"Such a shock would reignite the debate about rationalization, production stoppages, and relocating industry abroad," says Stelter.
Exports could also collapse, despite the favorable euro, theoretically making German exports cheaper.
The reason: global demand collapses as higher energy prices weigh on the overall global economy, especially in energy-dependent countries like China, India, and the USA.
As a result, entrepreneurs there spend less money, meaning fewer orders for the German industry.
Is Eurozone stability threatened?
The European Central Bank (ECB) could face a difficult dilemma. It has the legal mandate to maintain inflation at around 2% over the medium term.
If the war with Iran lasts only a short period, it should lower interest rates to support the economy: Lower interest rates make loans more favorable - this can stimulate investments and consumption.
But if the war with Iran lasts longer, there is a problem for the ECB: the ECB would then not be able to lower interest rates as economic support due to inflation resurgence - instead, it would have to pause or even raise interest rates.
The euro would likely remain under pressure. At the same time, the economy would lose momentum - in the worst case, stagnation and a recession would be imminent. This would cause capital to leave Europe.
"Higher energy prices would mathematically push up the inflation rate in the euro area by at least an additional percentage point if prices remain high for several months," Stelter explained.
At the same time, economic growth collapses, representing the "classic stagflation trap," according to Stelter.
"Politically, there is increasing pressure to support heavily indebted countries through low-interest rates and bond purchases. This further puts the ECB in the role of state financing under the guise of," he continued.
"In the logic of my previous argument, such a conflict raises doubts about the long-term stability of the current monetary order in the euro area," he continued.
A quick end is a happy end?
A rapid de-escalation of the war in Iran and a conflict in the Middle East lasting no more than 4-5 weeks could bring the euro back on a slightly better course. So far, it is completely unclear when and how the war in Iran will end.
Major resistance in Iran and from the Iranian leadership against a so-called "regime change" could, in the worst case, prolong the conflict for months.
"It wouldn't be a problem if the conflict ended in a few weeks and critical energy infrastructure in Saudi Arabia and Qatar were not significantly affected," Stelter concluded.