Europe Under Pressure: Risk, Energy, Resilience

European countries have avoided all direct involvement in the Iran war, but the mid-term fallout of the blockades on both sides of the Strait of Hormuz will be greater in Europe than it is for the United States. Without the strength in numbers that the EU and EFTA (the European Free Trade Association) confer on their members, the United Kingdom, with its above-average energy costs, is especially vulnerable to the spike in oil prices and the other key commodities for which the Strait is an export choke point.

Since the start of the Russo-Ukrainian war in 2022, Europe has undergone a massive shift in its energy supply chains by reducing its Russian gas imports from 45% to 12% and its oil dependency from 27% to 2%. As a consequence, between 90 and 95% of Norway’s oil and gas reserves are now sold into Europe while supplies from the United States and the Gulf have made up most of the remainder. This transition has proved expensive for Europe and reduced the continent’s competitiveness.

The importance of the other commodities impacted by the Iran war should not be underestimated. Above all, the shortage of two vital elements of the fertilizer industry, urea and ammonia, is threatening to push up food production costs not only in Europe but also from critical areas of crop and livestock production, notably South America.

Crisis Response and Structural Adjustment

But while industry and government have quietly entered crisis management mode to deal with many consequences of the Iran war, there are countervailing trends that offer some long-term hope for Europe.

As the Global Investment Risk and Resilience Index shows, the position of Scandinavia member states in the European Union, together with Switzerland and Germany, remain challenged only by Singapore. All these countries, excepting Switzerland, are now benefiting from significant injections of government funds into the arms industry. The value of European defense stocks has skyrocketed since Russia’s full-scale invasion of Ukraine, but the past eighteen months have witnessed a further acceleration as the Trump administration threatened the sovereignty of Greenland and cast a long shadow over NATO’s long-term future.

As a result, Europe is beginning to address investment issues that have long prevented it from acquiring superpower status. Along with the boost to the defense industry, several European countries are weaning themselves off their dependence on American digital infrastructure. Last month, France announced it was following Denmark’s example by migrating its entire civil service from Microsoft over to open-source European operating systems in a major blow to the American computing behemoth.

Political Realignment and Strategic Resilience

Another development which has strengthened Europe politically was the defeat in early April of Hungary’s Viktor Orban, whose FIDESZ government was swept out of power by Peter Magyar’s TISZA movement. The latter secured a two-thirds majority in parliament, which means it has the power to undo all the legislation aimed at neutralizing democratic checks and balances, which Orban had introduced since assuming power in 2010.

Hungary’s 9.5 million citizens represent a mere 2% of the EU’s population, but Orban has enjoyed an outsized influence in the Union by using his veto to block policies otherwise agreed upon by the 27 member states, notably with regard to supporting Ukraine. Unquestionably, the capricious and often anti-European policies of President Trump have damaged the far-right forces in Europe, such as Orban’s FIDESZ, and many, such as the Rassemblement National in France and the Reform Party in Britain, have been scrambling to distance themselves from Trump since the attack on Iran.

Europe has also been emboldened by the extraordinary success of Ukraine in turning the battlefield with Russia from the 20^th-century trench fighting that characterized the conflict in 2022 and 2023 to the hypermodern drone warfare of the past eighteen months. Despite the temporary boost of increased oil prices as a result of the war in Iran, Russia increasingly finds itself in a Ukrainian quagmire from which it is very hard to extract itself without leading to regime collapse.

Although Europe will struggle economically for the next two years, the signs that it is beginning to cohere as a political unit mean it is likely to continue to dominate the top ranks of the Global Investment Risk and Resilience Index for some years to come.