(Bloomberg) - Christine Lagarde used an audience of high-level Group of Seven officials to challenge Treasury Secretary Scott Bessent’s optimism that the Iran war’s economic fallout will be short-lived, according to people familiar with the matter.
Bessent played down the damage caused by weeks of fighting in the Middle East and argued that disruptions — including the de-facto closure of the Strait of Hormuz — will be temporary, the people said, asking not to be identified revealing confidential discussions.
The European Central Bank president pushed back, however, telling Bessent and the central bankers, finance and energy ministers convened for Monday’s G-7 video call that the effects would be felt for a long time because so much has already been destroyed, the people said.
Spokespeople for the Treasury didn’t respond to calls, text messages or emails. The ECB declined to comment.
The confrontation reflects growing tensions between the US and Europe, which is vastly more exposed to soaring energy prices and shipping disruptions triggered by a conflict it didn’t start.
The economic pain is already being felt: Data on Tuesday showed euro-area inflation jumped in March by the most since 2022, when Russia invaded Ukraine. Governments in the 21-nation currency bloc, meanwhile, are slashing their outlooks, hoping what they’d envisaged as a year of recovery doesn’t end up instead as a recession.
Bessent has sought of late to assuage US public fears over the fighting, arguing that the oil market is well supplied and saying the strait between Iran and the other Gulf nations should reopen over time.
Lagarde, on the other hand, has been sounding the alarm. The ECB’s severe scenario — based on acute energy-supply disruptions persisting until late 2026 and significant further destruction of infrastructure — has inflation peaking at 6.3%.
“We are facing a real shock — that is probably beyond what we can imagine at the moment,” Lagarde said in an interview with The Economist. When it comes to oil extraction, refinery and distribution, “too much has already been damaged and there is no way that it can be restored in a matter of months.”
The exchange with Bessent isn’t her first run-in with a US official this year. In January, she walked out of a speech by US Commerce Secretary Howard Lutnick at the World Economic Forum because she found his anti-European rhetoric “too much.”
Monday’s call was part of global efforts to mitigate the situation, with some governments having already decided to release emergency oil reserves. The G-7 countries said they’re ready to take “all necessary measures” to “preserve the stability and security of the energy market.”
They also recognized the importance of “coordinated international action” to ease spillovers and safeguard macroeconomic stability.
By Jana Randow
With assistance from Daniel Flatley
