In the week following the start of the conflict in Iran, economic issues resurfaced. Energy prices rose sharply, reminiscent of the surge seen during Russia’s invasion of Ukraine. The risk of inflation was immediately highlighted. This is indeed a risk, but probably not of the same nature as in 2022. I addressed this issue in a post published on March 5th.
Furthermore, the macro-global dimension seems relevant to understanding the new power dynamics should the conflict continue.
1️⃣ The fragmentation of the world. The conflict is far from unanimous. China, Russia, and many other countries disagree with the intentions of Israel and the US. According to the think tank “Le Grand Continent,” the countries explicitly supporting the Israeli-American action represent less than a quarter of global GDP and just over 8% of the world’s population. The share of countries that have condemned the operation represents 61.5% of GDP and 73% of the population. The disparity is stark and significant. One cannot help but question the impact of this division on international trade and on the allocation of resources within globalized value chains.
2️⃣ The lasting consequence of this fragmentation on the allocation of resources worldwide will be to the benefit of military spending. Regardless of the outcome and the duration of the conflict, the share of defense spending will increase everywhere. The fragmentation of the world and the rise of power dynamics are driving this trend. Who will be sacrificed? The active or the inactive?
3️⃣ The risk to the energy market, since a large portion of the fossil fuel supply is located in the Middle East at a time when US production appears to be plateauing. The issue of the Strait of Hormuz is raised. But above all, there are two additional dimensions. Europe’s dependence on fossil fuels. This leads to a scenario that could resemble that of 2022 due to insufficient energy independence. The other point is the impact of attacks by Venezuela and Iran on China’s oil supply. For the Americans, this is a joint, but not secondary, effect of these conflicts initiated by Washington. This would help to balance discussions, particularly on rare earth elements.
4️⃣ The more political dimension, that of the aftermath and the stability of the region, is on everyone’s mind. Previous operations in the Middle East have all ended in some form of instability.
5️⃣ The impact of this fragmentation on monetary dynamics. This doesn’t mean that the influence of central banks will disappear, but that it will change in nature. Each will fight for its own currency, its own region. This pattern is already emerging. The ECB and the Bank of China do not want their future dictated by the Federal Reserve and the US Treasury.
The dynamics of globalization seem a distant memory.
