The Taiwan Banker

War is an ugly word and has even uglier and more significant consequences, both on human lives and economies. The impact of any war is always devastating and long-lasting, regardless of the length of the conflict. The loss of life is obviously the most immediate and tragic impact of any war. There is no getting away from the terrible human consequences of war. The world is effectively, at war, at present, including the recent Israel-Hamas war, and the longer-dated Ukraine-Russian conflict. Both wars are directly impacting one of Taiwan’s major trading partners, the European Union (EU). The EU is a supranational political and economic union of 27 member states that are located primarily in Europe. It has a total area of 4.2 million km² and an estimated total population of over 448 million, vast in comparison with Taiwan’s 23 million. Israel-Hamas War An armed conflict between Hamas-led Palestinian militant groups and Israeli military forces broke out on 7 October 2023. Hamas attacked southern Israel, and Israeli military forces retaliated (and continue to retaliate) with extensive strikes on the Gaza Strip and a subsequent invasion of Gaza. The political, security, and social aspects of the Israel-Hamas conflict were immediately felt within the EU. The conflict has polarized public opinion with resulting demonstrations and protests in various cities in some EU countries, resulting in increased political tensions in the EU. These tensions put pressure on EU member governments to take a stance on the issue, which in itself can create additional tensions. There is potential for the conflict to have indirect security implications for the EU, particularly regarding the potential for radicalization and extremism among certain groups with sympathies for either side of the conflict. However, the EU is experienced in such extremist activities and to date at least, appears to be dealing adequately with this risk. European countries and the EU have been actively involved in diplomatic efforts to mediate and de-escalate the conflict by participating in (so far unsuccessful) ceasefire negotiations. Regardless of the current failures, EU diplomats are continuing to engage in diplomatic initiatives to address the situation. The conflict has also resulted in massively increased need for humanitarian aid to assist those affected by the violence, and the EU has been providing humanitarian assistance to the region. It has also led to an immediate displacement of people, many of which are now refugees seeking shelter in European countries. Refugees wishing to enter the EU is not a new problem or issue for the EU, but the Israel-Hamas war will continue to pose challenges for the EU’s immigration and asylum policies in the months and years to come. The Israel-Hamas war has also seen a rise in anti-Semitic incidents. Again, such incidents not new, but there has been a surge in such incidents, which is clearly a deeply rooted concern for the EU, member-state governments and right down to the community level within the EU. The impact of the Israel-Hamas war on the EU varies from one country to another and depends on factors such as the size of the local population with ties to the Middle East, the level of political involvement, and the effectiveness of counter-extremism measures in place, so it is important not to over-generalize the impact on the EU. The ongoing war will affect the EU through lower regional trade, tighter financial conditions, higher energy prices and lower consumer confidence. There are also concerns among economists that the conflict could spill over and engulf the Middle East, with Israel and Lebanon exchanging missiles, as Israel continues to bombard Gaza. There will be significant impact on economic growth and inflation in the EU unless energy price pressures remain contained, especially with the EU entering into winter. Whilst the Israel-Hamas war will directly affect EU economic activity via lower trade with the Middle East, the EU actually has limited exposure to the region. In fact, EU exports to Israel and its neighbors are limited to around 0.4% of its GDP. However, if the war continues, there are likely to be tighter financial conditions in the Middle East which would weigh on growth and exacerbate the existing drag on economic activity. The flow-on effect would probably be higher interest rates in the euro area, although in this relatively early stage of the conflict, there is no real clear pattern between financial conditions and previous Middle East conflicts, and there seems little or no let-up in the war. The most important and potentially impactful way in which tensions could spill over into the EU is through oil and gas markets. These very same markets have been adversely impacted by the Ukraine-Russia conflict and as noted above, the EU is entering winter with associated increases in oil and gas demand and usage. Commodities markets have seen increased volatility since the conflict broke out in early October. Brent crude oil and EU natural gas prices have risen by around 9% and 34%. Persistent oil price increases, say around 10%, will usually see a reduction in EU GDP by about 0.2% after one year, should the conflict continue for that period of time. Consumers, in turn, will find their energy bills rising at a time where is there already concern in many EU countries and a renewed race for renewables. Oil prices must however remain consistently elevated for the GDP impact to occur. Despite the conflict, Brent crude oil prices were almost back at pre-conflict levels at the end of October. Despite this apparent stabilization, the World Bank has warned that crude oil prices could rise to more than US$150 a barrel if the conflict widens and continues, but that is at best a precautionary warning and speculation may be imprudent. Gas price smay be more adversely impacted as compared with oil prices, as there will undoubtedly be a reduction in global LNG (liquefied natural gas) exports from Israeli gas fields. Gas markets seem less able to respond to adverse supply shocks. The market is anticipating a sizable increase in EU natural gas prices but again, there is no clear sign of what those increases will be at present. Consumer confidence must not be ignored, and some commentators see it as the final potential channel for spillover affects from this war. Parallels are already being drawn to the dramatic drop in confidence within the EU that occurred in the aftermath of Russia’s invasion of Ukraine in March 2022. Ukraine-Russia War The impact of the Ukraine-Russia war on Europe has been significant and multifaceted. The conflict has raised security concerns throughout the EU, as it is seen to represent a major breach of international norms and the post-Cold War order. European nations, including those not currently EU members, particularly in Eastern Europe, are worried about potential spillover effects and the need to bolster their own defenses. Sanctions imposed on Russia by the EU and other Western nations remain in effect and have had economic repercussions, affecting trade and investments in the region. One of the most immediate concerns was the EU’s energy security, which has come under intense scrutiny due to the EU’s reliance on Russian natural gas. The conflict has prompted efforts to diversify energy sources and reduce dependency on Russian gas, and a renewed interest in fast-tracking renewable energy. The conflict in Ukraine has contributed to a refugee crisis in Europe, as people from conflict-affected regions seek asylum in various European countries, placing a burden on host nations and their resources. Naturally, the EU has been actively engaged in diplomatic efforts to mediate and resolve the conflict and it has also led to increased attention to NATO (North Atlantic Treaty Organization) in Europe. The war has also caused a shift in alliances and political dynamics within Europe, with now closer cooperation between the EU and NATO members. The war triggered a massive shock to the global economy, squeezing supply and pushing up energy and food prices to unprecedented levels. Compared with other economic regions, the EU has been particularly vulnerable to the economic consequences of Russia’s invasion of Ukraine, as the euro area depends very strongly on energy imports, which accounted for more than half of the EU’s energy use in 2020. Russia had been a key energy supplier to the EU before the war. Russia and Ukraine also played a large role in the EU imports of food and fertilisers before the start of Russia’s invasion. With the EU seen by economists as a highly open economy,this makes it vulnerable to disruptions in global markets and value chains, and the war has added heavily to the inflationary pressures that were building up in the EU during the post-pandemic recovery. Overall, both wars will have implications for the EU and as the conflicts continue, so will the implications for the EU.