Europe's Economy Faces a 'Dilemma' Amid Middle East Conflicts: The Pressure of Stagflation and the Challenges of Supply Chain Restructuring

The ongoing escalation of the Middle East conflict has become the most prominent variable in the global economic landscape. This conflict not only reshapes the supply and demand balance of energy and food markets but also exerts a profound impact on global industrial chains and capital markets through supply chain transmission mechanisms. In Europe, the brief rebound of stock markets contrasts sharply with the heightened risk of stagflation, reflecting the vulnerability and complexity of the global economy under multiple shocks.

As a core hub of the global energy and food supply chains, the turmoil in the Middle East directly triggers market chain reactions. The Strait of Hormuz, through which 30% of the world's seaborne oil and 20% of liquefied natural gas pass, faces the risk of blockade due to the conflict, causing international oil prices to surge 117% in a single day, with the price of Brent crude briefly exceeding $119 per barrel. The shutdown of Qatar's liquefied natural gas facilities further cut off nearly 20% of global gas supply, causing European gas prices to soar by 40%-100% in one day, while diesel and gasoline prices in Germany rose 30% within two weeks of the outbreak, reaching historic highs of €2.1-2.2 per liter.

The food market was similarly not spared. The Middle East supplies one-third of the world's urea and 45% of sulfur (a raw material for phosphate fertilizer), and the conflict has caused fertilizer prices to rise by more than $100 per ton in a single week. Agricultural countries dependent on Middle Eastern fertilizers, such as India and Pakistan, face the risk of reduced production. The global food price index has risen 12% compared to pre-conflict levels, which could trigger a new round of food crises. The United Nations Food and Agriculture Organization warned that if the conflict lasts more than two weeks, the global agricultural supply chain could face systemic collapse, especially in Southeast Asian and African countries that rely on Middle Eastern energy and fertilizers.

Although European stock markets briefly rose at the beginning of the conflict, they were soon overshadowed by the specter of stagflation. On March 13, major stock indices in Germany, France, and the UK all fell, highlighting investors' pessimism about Europe’s economic outlook. The core issue lies in soaring energy prices: ECB models show that if oil prices remain above $100 per barrel, the Eurozone inflation rate could rebound to 3.5% in 2026, well above the 2% target; the German Economic Institute estimates that every $10 rise in oil prices would cost Germany’s GDP 0.3 percentage points.

Goldman Sachs downgraded its 2026 Eurozone growth forecast to 0.8%, noting that rising energy costs are eroding corporate profits, suppressing investment and consumption. German industrial orders fell 11% month-on-month, with energy-intensive industries like chemicals and automobiles facing production stoppage risks. The European Central Bank is caught between 'fighting inflation' and 'safeguarding growth,' with markets generally expecting a delay in rate cuts, though tighter policies could worsen the recession. Germany released 19.51 million barrels of strategic oil reserves, but this will only maintain supply for three weeks, failing to correct long-term imbalances.

The conflict has exposed the global economy’s excessive reliance on a single energy channel, prompting countries to accelerate supply chain diversification: Saudi Arabia, the UAE, and other countries are advancing hydrogen energy transitions, Chinese enterprises are investing more in Middle Eastern photovoltaics; European companies are shifting production to the U.S., Africa, and Latin America, with China-Europe freight trains cushioning maritime transport disruptions; the RMB settlement system is weakening the dollar’s status but temporarily pushing up gold prices. However, these adjustments are unlikely to quickly fill supply gaps, and the UN predicts global economic growth will fall to 2.7% in 2026.

Currently, the global economy is in a phase of 'conflict-driven rebalancing.' The Middle East conflict has exposed the vulnerability of existing supply chains while acting as a catalyst for energy transition and trade diversification. The volatility of European stock markets warns that policymakers need to find a delicate balance between combating inflation, sustaining growth, and promoting reforms, while businesses must respond to long-term uncertainty through supply chain resilience and technological innovation. In this 'stress test' of the global economy, only through strengthened international cooperation and policy coordination can the conflict be prevented from evolving into a systemic crisis.