What Does Red Sea Disruption Mean for Europe’s Economy? 

Container ships sail across the Gulf of Suez towards the Red Sea before entering the Suez Canal, in El Ain El Sokhna in Suez, east of Cairo, Egypt, March 17, 2018. Picture taken March 17, 2018. (Reuters)
Container ships sail across the Gulf of Suez towards the Red Sea before entering the Suez Canal, in El Ain El Sokhna in Suez, east of Cairo, Egypt, March 17, 2018. Picture taken March 17, 2018. (Reuters)
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What Does Red Sea Disruption Mean for Europe’s Economy? 

Container ships sail across the Gulf of Suez towards the Red Sea before entering the Suez Canal, in El Ain El Sokhna in Suez, east of Cairo, Egypt, March 17, 2018. Picture taken March 17, 2018. (Reuters)
Container ships sail across the Gulf of Suez towards the Red Sea before entering the Suez Canal, in El Ain El Sokhna in Suez, east of Cairo, Egypt, March 17, 2018. Picture taken March 17, 2018. (Reuters)

Weeks of attacks by the Iranian-backed Houthi militias on vessels in the Red Sea have disrupted shipping in the Suez Canal, the fastest sea route between Asia and Europe carrying 12% of global container traffic.

For the European economy, already skirting a mild recession as it tries to shake off high inflation, prolonged disruption would be a new risk to its outlook and could derail plans by central banks to start cutting interest rates this year.

Here are some factors that policymakers are considering as they assess the situation and its implications:

WHAT HAS BEEN THE IMPACT ON THE EUROPEAN ECONOMY SO FAR?

In macroeconomic terms, small to negligible. While Germany's Economy Ministry stressed it was monitoring the situation, it said this week that the only noticeable impact on output so far had been a few cases of stretched delivery times.

Bank of England chief Andrew Bailey concurred, telling a parliamentary hearing it "hasn't actually had the effect that I sort of feared it might", while acknowledging the uncertainties remained real.

No impact from the attacks has yet turned up in Europe's main economic indicators - including December inflation numbers, which ticked up slightly across the region on a mix of largely expected statistical effects, some one-offs and some pressure on prices for services.

That might change - watch next Wednesday's preliminary PMI readings for activity in European economies in January, and Feb. 1's first estimate of euro zone inflation for the same month. ECB President Christine Lagarde may well broach the subject in her news conference after next Thursday's rate-setting meeting.

BUT WHY ISN'T IT FEEDING THROUGH TO THE ECONOMY YET?

The main reason is probably that the global economy as a whole is still performing below par, which means there is plenty of slack in the system.

Take oil prices, the most obvious channel through which Middle East troubles could hit economies in Europe and beyond.

They haven't taken off yet because, as International Energy Agency executive director Fatih Birol told Reuters this week, supplies are solid and demand growth is slowing.

"I don't expect a major change in the oil price because we have an ample amount of oil coming in the market," he said.

German logistics giant DHL said it still had available air freight capacity - not an option for everyone - because the global economy was "not really pumping yet"

This subdued economic picture also makes it harder for companies to pass onto consumers any increases in costs they are encountering, for example by having to re-route around Africa. Many of them have rebuilt margins in the past year and accept they might simply have to suck this one up.

"Our best forecast at the minute is we're able to absorb the incremental cost that we estimate will come through and still achieve ... gross margin improvement," Poundland owner Pepco Group's executive chairman Andy Bond told Reuters.

Furniture retailer IKEA even said it would stick to planned price cuts and had the stocks to absorb any supply chain shocks. As long as that remains the case for enough companies, the disruption will not move the dial on consumer price inflation.

SO, CAN EUROPEAN POLICYMAKERS SIMPLY LOOK THROUGH THIS?

No - because the longer the disruption goes on for, the more likely it is to take a toll on the wider economic picture, even if gradually.

Using an IMF estimate of the impact of freight cost rises, Oxford Economics in a Jan. 4 note estimated gains in container transport prices would add 0.6 percentage points to inflation in a year's time. The ECB is expecting euro zone inflation to fall from 5.4% in 2023 to 2.7% this year.

"While this suggests that a sustained closure of the Red Sea wouldn't prevent inflation from falling, it would slow the speed at which it returns to normal," Oxford Economics concluded. It did not see this preventing an expected pivot to lower interest rates, however.

At the margins, the Houthi attacks and wider troubles in the Middle East represent one of the "geopolitical risks" that get referred to in the minutes of central bankers' monetary policy discussions. The fear is of escalation - and that fear itself may feed into the decisions that emerge.

Finally - and we may still be some way off this - there is the possibility the situation will encourage companies to advance plans drawn up after the COVID-19 pandemic disrupted trade for alternative, more predictable supply routes.

That could involve longer but more secure trade paths and "near-shoring" or "re-shoring" to bring production closer to key markets. But whatever options are explored, the likelihood is that they all have one thing in common - higher costs.



Official: Iraq Has Not Yet Applied for an IMF Loan

A floating oil export platform in Basra port, Iraq (Reuters)
A floating oil export platform in Basra port, Iraq (Reuters)
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Official: Iraq Has Not Yet Applied for an IMF Loan

A floating oil export platform in Basra port, Iraq (Reuters)
A floating oil export platform in Basra port, Iraq (Reuters)

Financial Advisor to the Iraqi Prime Minister Mazhar Mohammed Saleh revealed on Saturday that Iraq has not yet submitted a formal request for a loan from the International Monetary Fund (IMF).

The Iraqi News Agency quoted Saleh as saying that “Iraq enjoys close relations with the IMF, and since 2003, it has concluded more than five agreements, three of which were Stand-by Arrangements, while the other agreements related to emergency support.”

Iran's war has caused significant disruptions in supply chains, especially in the energy sector, which was severely affected by a near-complete closure of the Strait of Hormuz, through which about 20 percent of global oil supplies pass.

Saleh stated that “the Fund has played a significant role in supporting the Iraqi economy over the past 23 years, especially since Iraq is now considered one of the biggest victims of the ongoing war in the region, considering that 85 percent of its oil exports pass through the Strait of Hormuz. This has caused significant harm and international concern, given that Iraq is an important and active member in the stability of the region and world markets.”

He pointed out that there is an Iraqi government team in contact with the IMF, meeting with Fund officials for consultations twice a year.

He clarified that “Iraq signed an agreement with the IMF on July 7, 2016, for a Stand-by Arrangement by providing a significant loan, which played a major role in supporting the general budget,” noting that “signing an agreement with the Fund is a matter decided by the Iraqi government, and this does not prevent consultations between the two parties, as Iraq is a member of this institution responsible for global stability.”

Saleh mentioned that “Iraq will borrow from the International Monetary Fund if the need arises, but there is no formal request from the government yet, and the current need is for the war in the region to stop, and for its geopolitical impacts on oil exports to cease.”

He added that “technical assistance from the IMF is available now, unlike the issue of financing, which requires the approval of a program by the Iraqi government.”

He explained that “the loan itself represents a reform program to support the budget or to achieve social goals, such as supporting the health and education sectors, because it is a human investment that must be subject to conditions defining expenditure directions and commitment to a reform program agreed upon by the Iraqi state and the IMF.”


Mawani Adds CMA CGM’s Ocean Rise Express Service to Jeddah Port

Mawani Adds CMA CGM’s Ocean Rise Express Service to Jeddah Port
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Mawani Adds CMA CGM’s Ocean Rise Express Service to Jeddah Port

Mawani Adds CMA CGM’s Ocean Rise Express Service to Jeddah Port

The Saudi Ports Authority (Mawani) has added CMA CGM's Ocean Rise Express (OCR) shipping service to Jeddah Islamic Port, aiming to strengthen maritime connectivity between Saudi Arabia and global markets, support the smooth flow of supply chains, and increase the efficiency of port operations.

The OCR service will connect Jeddah to key international ports, including Kobe, Nagoya, and Yokohama in Japan; Xiamen, Yantian, and Nansha in China; Rotterdam in the Netherlands; Hamburg in Germany; and Southampton in the United Kingdom.

The route will utilize vessels with a capacity of up to 10,000 TEUs, according to SPA.

This addition aligns with Mawani’s efforts to enhance Jeddah Islamic Port’s global competitiveness and support international trade.

By enabling access to new markets, the initiative reinforces the Kingdom's position as a global logistics hub in line with the National Transport and Logistics Strategy and Saudi Vision 2030.


Lebanon's Financial Battles Persist Despite War Priorities

Lebanese President Joseph Aoun meets with a delegation from the Association of Banks in Lebanon (Lebanese Presidency)
Lebanese President Joseph Aoun meets with a delegation from the Association of Banks in Lebanon (Lebanese Presidency)
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Lebanon's Financial Battles Persist Despite War Priorities

Lebanese President Joseph Aoun meets with a delegation from the Association of Banks in Lebanon (Lebanese Presidency)
Lebanese President Joseph Aoun meets with a delegation from the Association of Banks in Lebanon (Lebanese Presidency)

Lebanon's unresolved financial and monetary issues continue to generate new and pressing obligations for the executive, legislative and monetary authorities. Although they have been partially overshadowed by the storm of war and its devastating human, reconstruction and social consequences, these issues remain high on both the political and economic agenda.

As the government's economic team works on amendments to the draft financial-gap law, including discussions over reservations raised by the central bank, newly proposed changes to the banking reform law, submitted by the government to parliament this month, have reignited the ongoing disputes within Lebanon's financial sector.

These disputes remain centered on the rescue plan and the treatment of structural crises that have persisted into their seventh consecutive year, most notably reflected in the repeated failure to meet reform commitments required to secure a financing agreement with the International Monetary Fund (IMF).

According to information obtained by Asharq Al-Awsat from a financial official, wartime developments and their repercussions have effectively granted Lebanon additional time, at least until the autumn meetings of international financial institutions, to complete legislation forming the roadmap for restoring financial stability and recovering deposits.

This includes the sought-after reforms of the banking sector, alongside compliance with anti-money laundering requirements, particularly measures aimed at curbing the informal economy, shutting down channels used for illicit financial flows, and addressing excessive cash circulation through enhanced source-to-beneficiary verification requirements.

A notable development is expected to influence future deliberations in parliamentary committees and the legislature's general assembly. In an updated report, the IMF classified the crisis affecting Lebanon's banking sector as a "systemic crisis," placing it alongside similar crises experienced by 13 countries worldwide over the past decade, from Angola in 2015 to Vietnam in 2022. This classification is expected to help align Lebanon's reform measures and responsibilities with international standards and draw on rescue plans implemented in comparable cases.

According to the financial official, the IMF's classification could help settle long-running domestic disputes that have prolonged the failure to adopt a comprehensive plan for exiting the financial and monetary crisis and containing its social and economic consequences. Such a plan remains the only viable pathway to restoring confidence in the financial sector and returning gradually to economic recovery, particularly after the enormous reconstruction and economic losses caused by successive destructive wars, estimated to exceed $20 billion at a minimum.

Lebanese President Joseph Aoun meets with Central Bank of Lebanon Governor Karim Souaid on May 7. (Lebanese Presidency)

Systemic Crisis and Financial Sector Restructuring

The official added that this approach takes on added importance amid discussions surrounding the restructuring of the financial sector, particularly the draft law on restoring financial order and recovering deposits submitted by the government to parliament.

"The recognition of the systemic nature of the crisis requires reconsidering some of the proposals currently on the table in a way that ensures a fairer distribution of responsibilities and burdens among all parties concerned, rather than reducing what happened to a narrow framework and placing the full cost of the collapse on depositors and banks," the official said.

This international reassessment is consistent with an opinion issued by Lebanon's State Council more than two years ago, which concluded that Lebanon was not facing an ordinary banking crisis but rather a systemic one, assigning primary responsibility for the financial crisis to the state because of its reliance on borrowing from the central bank to finance budget deficits.

Banks Ready to Shoulder Responsibilities

The issue resurfaced during a meeting between President Joseph Aoun and the board of the Association of Banks in Lebanon, headed by Salim Sfeir. The association conveyed the banking sector's readiness to assume its responsibilities and participate in absorbing losses, provided that reform does not amount to liquidation and that restructuring does not unfairly burden both banks and depositors. It stressed the need for a fair allocation of responsibilities and costs while safeguarding depositors' rights and preserving the sector's viability.

Aoun emphasized "the importance of reaching a fair and comprehensive solution to the banking crisis that satisfies all parties and preserves rights equally."

He stressed the importance of reform without destroying or undermining the sector, adding that "it is the state's duty to stand by the banking sector, reform it and restructure it in order to safeguard the economy and guarantee depositors' rights."

He further noted that "without a sound banking sector, there will be no investment, and there will be no country."

A general view of Beirut, Lebanon. (Reuters/File Photo)

Central Bank Governor Voices Reservations

Earlier, Central Bank Governor Karim Souaid openly expressed reservations about key provisions in the government's proposal, stating that "the draft requires further clarification and strengthening regarding the state's obligations. Since the state is ultimately the entity that used these funds over many years, its contribution must be explicitly defined, measurable, legally binding, and linked to a clear and credible timetable."

In several remarks, Souaid highlighted the challenge of distributing financial burdens and responsibilities among the state, the central bank and commercial banks. He additionally stressed the need to reduce the fiscal deficit by eliminating irregular claims, categorizing deposits into clearly defined groups, and carrying out repayments through a combination of cash payments and asset-backed financial instruments in phases and within available liquidity limits.

Banks continue to insist on their right to participate in discussions that will determine their future. They have outlined an approach that seeks to balance depositor protection with the sector's continued viability. In a memorandum submitted to officials, they argued that "instead of ensuring a fair distribution of responsibilities, the draft law submitted to parliament exempts the state, which bears primary responsibility for the financial gap, from making any clear contribution toward losses. Moreover, the proposal harms both the banking sector and depositors alike."

For instance, the draft law, despite objections from the monetary authorities, requires the removal of impaired assets, meaning assets deemed unrecoverable for depositors, and proposes deducting them from deposits without returning them to their owners. At the same time, banks would be required to absorb their value as losses. In practice, this would impose losses on both depositors and banks, pushing banks toward liquidation rather than enabling them to repay deposits.

Consequently, if banks are burdened with obligations that exceed their responsibilities and capacities, the outcome will be clear: the liquidation of the majority of banks.

The financial official noted that international experience shows that systemic crises, regardless of their severity, can become a starting point for rebuilding stronger and more modern financial systems when political will and serious reforms are present. The current period therefore represents an opportunity to redesign a new economic and financial model that can restore Lebanon's regional financial role and rebuild confidence both domestically and internationally.

In this context, the official said, it is essential to adopt a balanced and inclusive approach that rebuilds confidence in the financial and banking sectors while safeguarding the rights of depositors and investors and ensuring the continuity of financial institutions.

Economic recovery cannot be achieved through confrontational policies or temporary solutions, but rather through a comprehensive reform vision that recognizes the true scale of the crisis and lays the groundwork for a gradual and sustainable recovery.