EXCLUSIVE. The effects of the Iran war on prices “will last for years.” The series of warnings launched in Bucharest by the chief economist of one of the most important European banks

There is one technical detail that Beata Javorcik, the chief economist of the European Bank for Reconstruction and Development, mentions almost in passing in her discussion with HotNews, but which says more about the scale of the energy crisis than any newspaper headline: It will take between three and five years to get Qatar's destroyed natural gas infrastructure back up and running. That means chain effects in the economy. “Even if the war stopped today,” says the EBRD's chief economist, “the impact will persist.”

We are not talking about a crisis that is resolved when an armistice is signed. We are talking about a reconfiguration of the European energy market that will last at least until the end of the decade.

Javorcik, who spoke with HotNews journalists in Bucharest on the sidelines of the conference organized by The Economist, emphasized an “expensive” truth: Europe is a continent that is absorbing the second major energy shock in three years – after Russian gas stopped in 2022, now Qatari gas cut off by the Strait of Hormuz. This time, natural gas prices in Europe are six times higher than in the United States. Before the war in Ukraine, the difference was negligible.

“In 2019-2020, natural gas prices in Europe were the same as in the US. After Ukraine, we reached four times higher. Now, they are six times higher,” says the EBRD's chief economist.

Five channels, one shock

“Even if the war stopped today, the impact of the war will persist because of the destruction of the LNG infrastructure in Qatar,” says the EBRD chief economist, when asked by HotNews about the impact of the Iran war on European states.

Javorcik maps precisely how the war in Iran is spilling over into the economies of the EBRD region. It's not a simple, single-source shock. There are five distinct channels, she says, that feed off each other.

The first and most obvious is the price of natural gaswhich erodes the competitiveness of European industry in general and Germany in particular.

“If there is weakness in the German economy,” she says, “that will contaminate the region, affecting supply chains in the automotive sector.”

Romania does not only export cars; it exports components, industrial software, furniture, food – everything a healthy German economy buys.

The second channel is the price of oilwith its classic effect: higher inflation, slower growth, pressure on already overstretched government budgets.

The third channel: disrupting supply chains. Aluminum, sulfur, helium. The auto industry is already reporting aluminum shortages, the European official explains. “We don't have a complete picture yet of where these bottlenecks will be,” Javorcik admits.

The fourth channel – less discussed but potentially severe – is food prices. The Middle East region is a major exporter of urea, the raw material in nitrogen fertilizers. The conflict erupted in the midst of planting season, Javorcik says. If farmers cut back on fertilizers, harvests fall, food prices rise, inflation accelerates, she elaborates.

And the fifth channel directly targets some economies: tourism from Lebanon and Jordan and remittances from North Africa, the sums of money usually transferred by migrant workers to their families in their country of origin and which constitute an essential source of income for households and a pillar of the economy.

“North African countries in particular have a lot of people working in the Gulf,” says Javorcik.

“There are quite a few channels,” she concludes.

Romania: less exposed, but not immune in shock

When the discussion reaches Romania, an important distinction emerges. The country is a gas producer, with a new offshore platform in the Black Sea – the Neptun Deep platform, which will start delivering gas next year. That partially protects her.

“Romania, being less dependent on imports, is in a much more comfortable situation,” says the EBRD's chief economist. But, he immediately adds, “She's not immune to shock.”

The proof came on the very day of the interview. Javorcik had just listened to Romania's finance minister talk about Romania's borrowing costs. Until a few weeks ago, Romania was enjoying declining rates on international markets. In the last three weeks, the cost of borrowing has increased by one percentage point.

The mechanism is simple: in times of uncertainty, investors flee to safe-haven assets and demand higher risk premiums for economies perceived as vulnerable. Romania already feels the effects of the war not only at the pump, but in the interest on the public debt, explains Javorcik.

Romania's main exposure remains, in Javorcik's opinion, through German value chains. A stagnant German economy means fewer orders for Eastern European suppliers. And Romania is deeply integrated in these chains – not only in the automotive area, but in everything produced by a country that has grown through manufacturing exports.

EU funds are not a growth strategy

Looking towards the horizon of five to ten years, Javorcik does not avoid an uncomfortable conclusion for the Romanian political class: a growth strategy built mainly on European funds is not sustainable.

PNRR expires this year, and the future EU multiannual financial framework could bring Romania smaller allocations. SAFE funds, the EU's loan program for strategic and military strengthening, are massive – nearly €17 billion for Romania – but they are also time-limited.

“You shouldn't build a long-term growth strategy only on external funding, and only on public funding,” she says bluntly. “What you really need is a growth strategy that is built on private investment.”

Private investment, in turn, implies predictability and stability – exactly what is lacking in moments of geopolitical turbulence.

“Uncertainty kills investment,” says Javorcik. But she also identifies a window of opportunity: the relocation of production to Europe, accelerated by precisely this instability of global chains. Romania, with its relatively cheap and qualified labor force and its geographical position, is “a potential beneficiary”.

Defense spending as industrial policy

One of Javorcik's more unconventional arguments concerns defense spending. As the PNRR expires, SAFE becomes the new mechanism through which European money reaches the states. The amount is huge. How it's spent, she says, will define the region's competitiveness for decades.

There are three decisions that every government must make:

• How much money goes to defense versus shock-resistant infrastructure, cyber security, energy diversification?
• How much is bought domestically versus imported?
• And how much of the budget goes into research and development (R&D), meaning tomorrow's systems, not today's?

“Expenditure on research and development has the greatest potential to benefit the country's growth and competitiveness,” says Javorcik.

The 4 billion euros that Romania dedicates to highways to Ukraine and Moldova, for example, is a right move: it positions the country for the post-war reconstruction of Ukraine, a potentially huge economic contract.