How could the Israel-Hamas conflict's economic repercussions not only trigger a global recession but also stall crucial connectivity projects like the India-Middle East-Europe Economic Corridor? Let's understand it through this explainer.
Understanding the Historical Context
In the late Bronze Age, Egypt's influence stretched over the region that would become Israel. Fast forward to 1948, the establishment of the State of Israel marked a pivotal moment. The Six-Day War resulted in the occupation of various territories, profoundly impacting Palestinian lives. Israeli settlements, starting with Kfar Etzion, sprung up in the West Bank, and their numbers have grown to over 620,000 settlers in 200 settlements.
Hamas' Perspective and Recent Trigger Points
Hamas attributes its recent attack to accumulated frustration over Israeli policies, including outbreaks at the Al-Aqsa Mosque and the treatment of Palestinians. The violence started with Israeli attacks on the Gaza Strip in response to threats from the Palestinian Islamic Jihad.
Timeline of Israel-Hamas Conflict: From 1948 to the Recent Clash
Establishment of Israel and Displacement (1948): The conflict traces back to Israel's establishment in 1948, leading to the displacement of 750,000 Palestinians. The aftermath divided the territory into Israel, the West Bank, and the Gaza Strip.
Hamas Takes Control of Gaza (2007): In 2007, after a civil war with Fatah, Hamas assumed control of Gaza, adding a new layer to the ongoing conflict. Multiple battles, including an 11-day clash in 2021, have characterized the strained relations between Hamas and Israel.
Unprecedented Attack by Hamas (October 7, 2023): On October 7, 2023, Hamas launched a significant attack on Israel, triggering an Israeli counterattack the following day. As of October 10, 2023, Hamas has taken hundreds of captives and caused thousands of casualties in Gaza.
Impact on the Global Economy: Oil Prices and Trade Disruptions
Rising Oil Prices and Economic Ramifications: The conflict's repercussions extend to the global economy. The sensitivity of crude oil prices to Middle East events has already led to a significant increase. If the conflict escalates, oil prices could skyrocket to $150 a barrel, potentially causing a global recession. A 10% increase in oil prices could affect global economic growth and inflation.
Trade Disruptions and Potential Global Consequences: The Israel-Hamas conflict risks further deglobalization, impacting trade cooperation, information sharing, technology sharing, and financial-market linkages. This could affect European economies through various channels, such as lower regional trade, tighter financial conditions, higher energy prices, and reduced consumer confidence.
Impact on the India-Middle East-Europe Economic Corridor (IMEC)
Stalling Progress and Skepticism: The conflict has affected the development of the India-Middle East-Europe Economic Corridor (IMEC), a connectivity project announced by several countries. Progress has stalled, and there are concerns in Riyadh and Amman about the feasibility of the project.
Potential Setbacks and Future Outlook: While the conflict poses challenges to the IMEC project and global trade discussions, stakeholders are unlikely to abandon it. The core logic of linking markets remains strong, particularly for India. The conflict's impact on global trade discussions extends beyond IMEC, potentially worsening tensions and having detrimental consequences, especially if it spreads to major oil-producing nations like Iran.