War Is Stretching Europe’s Finances Thin. Why A Debt Crisis Isn’t Likely.

The article warns that the Iran war is straining Europe’s public finances—raising energy and food prices, denting growth and making it harder for over-indebted countries to “grow” out of deficits. Higher energy costs (about $32 billion extra for the bloc) and raised food inflation expectations (from 2.3% to 2.9% through 2027) could push the ECB toward tighter policy, increasing sovereign borrowing costs. France and Italy are especially vulnerable given public-debt-to-GDP ratios above 100% and large deficits, while the U.K. is better positioned due to its own currency and monetary policy flexibility. Although French and U.K. yields have risen ~0.5–0.7 percentage points to highs not seen since 2008, the ECB’s Transmission Protection Instrument reduces the odds of a systemic euro-area bond crisis. Overall, market risk is elevated but a full-blown European sovereign debt crisis is judged unlikely.