Christine Lagarde, President of the European Central Bank has warned that the risks of Iran war are likely to be underestimated. She also warned that ECB is prepared to hike interest rates to manage the inflationary pressures on Europe due to the war. Lagarde may be talking about the impact on Europe, but this is a clear warning of the scale and magnitude of the fallout of this war that will impact every country in the world.

The Iran war has rapidly evolved from a regional military campaign into a geopolitical and geoeconomic crisis. What initially appeared to be a limited military operation has instead triggered a chain reaction across energy, financial, international travel and global agriculture markets as well as geopolitical alliances, just to mention a few. In an interconnected and intricately interdependent world, it is almost impossible to visualize and quantify the impact until months later after the war is over and the dust has settled.

Initially it appeared that both the United States and Israel were focused, strategically, on defanging Iran’s nuclear and military capabilities, maintaining regional deterrence and preventing escalation.

As the war entered the fourth week, the often conflicting and confusing communiques issued by the US and Israel suggested that they had lost sight of their strategic objectives. It reflected a lack of alignment between the US and Israel on the one hand and an unclear expected outcomes on the other from this expensive war. Many analysts expect a long, drawn-out war.

The collateral consequences have been humungous. The snapping of fuel supply chains has caused acute shortage of petrol, Liquified Natural Gas (LNG) and aviation fuels, sending a domino effect ripping through the global economy.

The poorest nations of the world, obviously, are the most vulnerable and are already bearing the brunt of this conflict. What is a brutal consequence of this war is that people, totally unconnected, will face hunger, disease and starvation in the coming months. As can be expected, a massive humanitarian and economic crisis is brewing on the horizon.

It is difficult to imagine a parallel in history to this economic and human disruption on such a scale in such a short time. Even rich nations will not be spared. Australia’s ABC reported that over 100 petrol pumps have run dry. The European Union faces a massive energy crisis, and reports indicate that it may take several months to restore gas supply.

As regards the Gulf countries, the situation is no better. As the war escalated, the economic damage has skyrocketed. More worrying is the bombing of refineries, electrical and power infrastructure.

China and India too face unprecedented challenges on multiple front - energy, fertilizer, food, exports and lot more. Many nations have declared “energy emergency” to manage the fallout of acute fuel shortage.

The US also faces massive challenges. The immediate impact, as expected, was the gas prices at the pump, rise in cost of agricultural inputs including fertilizers

Losses on the stock market continue to destroy investor sentiments in the US and around the world. Some estimates indicate that over $3.2 trillion in US market capitalization has been erased. As the conflict rages into the fourth week now, President Trump’s offer of a five-day-pause only had a limited impact on calming Wall Street.

Federal Reserve Chair Jerome Powell, for his part, acknowledged that the oil crisis resulting from the war could drive up inflation. He also said that the implications of the Iran war on US economy are uncertain. That could be interpreted as an unwillingness on the part of the Federal Reserve to quantify the magnitude of the aftereffects of the war on the US economy. Some estimates have suggested that US inflation could reach a high of 4.2%

Be that as it may, the American consumer will face continued economic uncertainty – persistent high unemployment, higher gas prices, higher cost of living and a big slowdown in consumer spending – the engine of US economy - that could eventually lead to recession.

Small and medium businesses, America’s bulwark, already weighed down by high tariffs resulting in higher input costs, will face a new uphill journey. Now with the added fuel costs, it would be reasonable to expect that many will not make it.

In an address to the Indian Parliament, Prime Minister Narendra Modi had warned that the US-Iran war and its impact on fuel supply chain could have long lasting impact all over the world and urged for preparedness to face challenges ahead. This is a clear and stark warning from an astute and respected world leader. It should not be taken lightly.

The US and Israel may achieve their strategic objectives in defanging Iran. But the moot question is at what cost to the average American consumer? What about the impact on the rest of the world who have no part to play in this conflict?

The world will pay a huge price for a war they did not want, for a war in which they had no say. Even with an immediate cessation of fighting, it will take years for the global economy to recover.

As Christine Lagarde, President of the European Central Bank had warned, we should not underestimate the colossal problems arising from the Iran war. Dialogue and diplomacy to resolve the conflict quickly may be the only path to sanity.