The escalating conflict in the Middle East is leading to higher energy prices and increasing pressure on state budgets in European and Asian countries, according to The New York Times (NYT), citing experts.
The situation in Europe
European and Asian countries depend on oil and gas imports, and inflation there is a major problem. The authorities in these countries face a dilemma - either increase public aid spending against the backdrop of rising energy prices, which would be unpleasant for investors, or restrict budget spending, which could cause public discontent.
Although European countries import little gas and oil from the Middle East, energy prices have risen sharply. According to Sander Thordvar, chief economist at the British organization Center for European Reform, the overall situation with public finances in Europe is favorable, but if European countries decide to spend more to help their populations, as they did during the crisis in 2022, the consequences of such measures “will be painful”, the analyst believes.
The situation is most difficult in Britain. This week, the country's authorities allocated 53 million pounds (approximately 70 million USD) to help those who use heating oil, especially in Northern Ireland. In addition, the British government decided to maintain “fiscal discipline“ and “reassure investors“ who are concerned about the country's high debt levels and low growth prospects. “The United Kingdom is particularly vulnerable“, the expert noted.
If high energy prices in Germany persist for a year, this could lead to a slowdown in economic growth by about half, to 0.5%. Authorities in neighboring France are struggling to reduce debt levels, so analysts say the republic “cannot afford to spend lavishly.”
The situation is least difficult in the southern European countries of Greece, Spain and Portugal. They have improved their financial situation in recent years, either by reducing debt or, in the case of Spain, by significant economic growth. As a result, these countries have been able to take measures to protect households and businesses against rising prices. Specifically, Portugal has cut taxes on diesel, while Greece has imposed restrictions on profits from the sale of fuel and some food products.
The situation in Asia
As Albert Pack, chief economist at the Asian Development Bank, told the newspaper, Asian countries have managed to reduce the gap between high government spending and low revenues in recent years, which has widened during the coronavirus pandemic. However, global trade problems stemming from the conflict over Iran could cause “another shock“ and lead to debt growth.
Emerging Asian markets are most vulnerable to the negative impact of the crisis, according to Stefan Angrik, an analyst at Moody's Analytics. He estimates that in Southeast Asia, energy price volatility has historically been addressed through government financing. Thailand and Indonesia, which are seeking to increase fuel subsidies, could face significant downgrades to their sovereign ratings, making it harder to borrow.
The analyst noted that Bangladesh and Pakistan, which rely on oil and gas supplies from the Middle East and are already experiencing financial difficulties, are the most vulnerable. The economies of the Maldives, as well as Pacific nations such as Tonga, Fiji and Samoa, are also at risk.
“Although energy prices are still far from 2022 levels, the need for [high] spending and the damage to economic growth will increase if the war drags on,“ the publication concluded.