War, its recurrences and its costs

Armed conflicts have always had exorbitant economic costs, not to mention human losses. The cost of war is difficult to quantify. It depends on the duration of the conflict and the “aftermath”. In fact, the economic consequences of armed conflicts, like the causes, are always complex to understand.

The risks associated with conflicts generate many economic uncertainties, directly noticeable in budget constraints and macroeconomic performance. While the short-term effects of wars vary depending on the situations and the intensity of the conflicts or the effectiveness of the policies adopted to counter them, many studies have suggested that major conflicts were linked to long cycles of the economy. Wars would be a way to regulate the global economic system and have a more profound structural effect on the economies in conflict.

Analysing the cost of war must be approached from a multidimensional perspective, integrating direct military costs, infrastructure destruction, human losses, and systemic macroeconomic effects. These costs, combined and interdependent, far exceed immediate budgets and follow a logic of capital destruction (physical, human, and institutional) with effects spanning several decades. In this light, what about the current war in the Middle East?

Are wars part of the economic cycle?

Nikolai Kondratieff, the Russian economist, in the 1920s, hypothesized that the capitalist economy evolved in long cycles, with a total duration of 50 to 60 years. The ten Kondratieff cycles that spanned from 1495 to 1980 consisted of four phases: expansion, war, stagnation, and recovery. War is traditionally associated with the expansion phase or the transition to decline, acting as a catalyst to stimulate a stagnant economy, correct imbalances, and accelerate technological innovation.

Kondratieff indeed established a link between wars and long economic cycles: the former coincided with the latter. Nations fight to ensure dominance. Recent studies have highlighted several elements: in expansion phases, waves do not reveal a higher frequency of wars compared to depression phases. However, conflict intensity is higher in the former than in the latter. Wars contribute to synchronizing the cycle among different national economies. They are a recurrent phenomenon that exacerbates structural violence. Every major war gives rise to a dominant power for a century and a half. Hence, a discrepancy between the power cycle and the economic cycle.

The hypothesis of periodicity of conflicts remains controversial. While cycles have not disappeared, their nature might have been modified by globalization and the impact of new technologies. Wars, although always arising all around the world, seem to have lost their economic synchronization role that they used to play among nations in the past. Some argue that this cycle of clock or cycle leveling function seems to be more effectively replaced by the Stock Exchange and financial crises nowadays.

Statistically, wars rather favor stock markets. Stock prices decrease before hostilities and then rise, stimulated by “patriotism” and increased public spending.

The psychological impact of a war (hoarding of consumer goods, freeze on investments) has a much stronger economic translation than financial constraints. This was observed during the Second World War (1941-1953), the Korean War (1950-1953), the Vietnam War (1965-1973), and the Gulf War in 1991. The American inflation of the 1960s, which led to the abandonment of the gold standard, the fall of European currencies, and the recession of the 1970s, is not solely due to Vietnamese expenses, even though they contributed to it.

Similarly, the idea that the 1993 economic recession stemmed mechanically from the 1991 Gulf War has been refuted by economic historians. Besides the cyclical trend being already towards a downturn, the conflict unfolded at the expected time span and took place at a relatively reduced cost – of which 80% was covered by the US allies.

However, the average number of nations in conflict in the world has significantly increased since the fall of the Berlin Wall, from about 35 during the Cold War period to over 60 in the 2000-2010 period. Experts believe that the accumulation of conflicts in recent years is driven by the urgent need for access to vital resources. According to specialists, the fight for these natural and energy resources concerns not only oil, with the resulting ongoing tensions in the Middle East, but also gas and black gold from the Caspian Sea, with a certain destabilizing effect on the Caucasus region.

Yet, hydrocarbons are not the only reasons for conflicts. Mineral resources – especially diamonds – and precious woods are also major geopolitical stakes. The struggle for water, a vital transnational resource, has intensified. From these conflicts, known and more or less localized, new threats have emerged on a globalized world scale (terrorism, mafia economies). Globalization, which often allows the uncontrolled movement of individuals and products, has been a critical factor in the globalization of conflicts (state fragmentation and proliferation of new nation-states). Technology, communication devices, and their geographic spread also play a significant role in these dynamics.

The Exorbitant Costs of Conflicts: The Cases of Ukraine and Gaza

The debate on long and war cycles is resurfacing with the wars of recent years: Ukraine, Gaza, and present-day Iran. However, the focus is less on positioning this war in the long economic cycle, on its recurrence in the region than it is on understanding the costs it generates and its short and long-term effects on the economies involved. Although war represents a cost, it cannot be reduced to this single dimension. War expenses are generally seen as irretrievable costs.

Quantifying the cost of war is delicate due to its contingent nature on the assumptions made about the war. In the past, there have been many mistakes in estimating the costs of wars. For example, the Vietnam War, initially considered short in 1966, was projected to cost the US budget 10.5 billion dollars for a year. By 1973, it was estimated to cost 110 to 150 billion dollars. In the case of the Iraq War, the American Administration estimated a figure nearly 60 billion dollars based on a short war assumption. Many actors believed that the war would be brief and the economy would quickly recover, but the military campaign lasted longer. This was a bill that Washington had to pay, even though the “coalitions” were invited to share the costs.

The conflict in Ukraine provides a broader perspective on the costs. The Ukrainian conflict, since 2022, has resulted in direct and indirect costs estimated at several hundred billion dollars. According to a study by DR Henderson, a researcher at the Hoover Institution, the total cost of the war for Moscow would amount to 2.5 trillion dollars. The conquest came at the price of over a million human losses, 12,000 tanks, nearly 25,000 armored vehicles, and about 400 planes.

The cost represented by the losses of military equipment is estimated at 125 billion dollars, the operational costs associated with waging the war at 3.1 billion dollars per month, and the losses of wealth (the “lost” GDP due to war) at 1.124 trillion dollars. The total amounts to 115% of the Russian GDP for 2024, according to World Bank figures.

On the Ukrainian side, joint estimates by the World Bank, the United Nations, the European Commission, and the Ukrainian government suggest a cost of 588 billion dollars for the reconstruction of Ukraine after the war over the next decade. This is almost three times the country’s GDP. An astronomical amount that gives an idea of the devastation in the country. The study, however, does not include data related to the recent escalation of Russian attacks on Ukrainian energy installations.

The war, now entering its fifth year, has triggered the largest refugee crisis in Europe since World War II, with over 6 million Ukrainians living as refugees outside the country. Additionally, more than 4.6 million Ukrainians have been internally displaced.

The war in Gaza was characterized by massive destruction of civilian infrastructure, complete disorganization of the local economy, and a major humanitarian crisis. A report by the World Bank Group, the United Nations, and the European Union estimates the reconstruction and recovery needs in Gaza at 53 billion dollars, based on the provisional assessment of damages and needs in Gaza and the West Bank.

This quick estimation, considering on-site access restrictions and evolving situations, is based on the assessment of damages, losses, and recovery and reconstruction needs in almost all sectors of the Palestinian economy. Physical structure damages amount to about 30 billion dollars, with housing being the most affected sector, accounting for 53% of damages, followed by trade and industry with 20%.

Essential infrastructure (health, water, transportation) accounts for over 15% of damages. Economic losses due to decreased productivity, income losses, and operating costs amount to 19 billion dollars, with the health, education, and commerce sectors being the most affected. Some sectors have needed reconstruction funding exceeding the value of physical destruction, especially for managing the 41 to 47 million tonnes of gravel and debris.

Beyond physical destruction, the loss of human capital due to deaths, injuries, and displacement leads to a long-term decrease in growth potential. The war in Gaza has caused over 75,000 deaths, the majority being civilians, in addition to over 100,000 injuries and thousands of potentially disabled individuals. The entire population of Gaza – around 2.3 million people – has been affected by massive displacements, with internal displacement rates exceeding 70% of the population.

This war has cost Israel over 68 billion dollars by 2025, according to the Central Bank of Israel, representing an exceptional level for a mid-sized economy. Daily direct expenses amount to around 246 million dollars, and weekly economic losses due to labor market disorganization can reach up to 600 million dollars. The budgetary effort has led to a significant deterioration of macro-financial balances, with a public deficit of nearly 7% of GDP and an increase in the debt/GDP ratio.

The Iran War: What Will the Final Cost Be?

Measuring or estimating the cost of the ongoing war in the Middle East is still impossible in the sense that it is not limited to strikes against Iran, it is not over yet, and uncertainties about its escalation, intensity’s pace, extension territories – including Gaza, Lebanon, Gulf countries, and Israel – prevail. Moreover, the conflict exhibits higher financial intensity concentration, especially due to massive use of high-tech weaponry systems and the central role of aerial strikes.

Considering potential collateral incidents and costs of post-campaign occupation, which might involve prolonged maintenance expenses on the ground for thousands of soldiers, is necessary. Despite the difficulties in estimation, one thing appears certain: the amounts will be considerable, at orders of magnitudes incomparable with recent contemporary wars. This current war between Iran, Israel, and the US is built on a logic of hyper-technological intensity. Military costs are concentrated in time and dominated by the use of very high unit value weapon systems.

Furthermore, the conflict’s extension to Iran and the Gulf introduces a global systemic dimension. The disruption of the Strait of Hormuz – a passage for about a third of the world’s oil supply – poses a risk of an energy shock similar to the 1970s, with projected oil prices possibly reaching 150 to 200 dollars per barrel in case of prolonged blockage. The International Energy Agency (IEA) already foresees a major energy and food crisis, likely to trigger inflation, recession, and financial instability on a global scale. As such, the conflict’s cost transcends regional boundaries to become a factor of global destabilization.

The US has committed between 9.6 to 12 billion dollars since October 2023 for its operations, with over 21 billion in military aid to Israel. The 2026 escalation against Iran introduces a significant scale shift: in just six days, American operations cost about 12.7 billion dollars, at a spending rate close to 500 million dollars per day. This financial intensity reflects the technological aspect of the conflict (precision missiles, anti-missile systems, advanced aviation), characteristic of modern wars with strong capitalist intensity.

For the US, the cost of war is not limited to military expenses but includes significant budget opportunity costs, amid high public debt. Resources allocated to the conflict reduce the capacity to invest in infrastructure, research, or energy transition. Additionally, disruptions in oil tanker markets due to tensions in the Strait of Hormuz lead to direct inflationary pressures affecting the American economy.

The war with Iran could indeed become a financial abyss for the American Administration. The War Secretary is demanding an additional 200 billion dollars in budgetary extension to continue military initiatives. This sum is intended to ensure that ammunition stocks are replenished. It represents a fifth of the annual Defense budget. This record amount is even higher than the 188 billion dollars in military aid allocated to Ukraine by the Biden Administration over three years.

In essence, if the conflict were to last three months, it would be more expensive to the American military than the 2003 Iraq War. At the time, the Administration estimated the cost of the second Gulf War to be around 60 billion dollars. According to Joseph Stiglitz and Linda Bilmes, the total economic cost ranged between 1 trillion and 3 trillion, including veteran care, debt interest, reconstruction costs, etc. For this new war, the total costs could also be astronomical, as they remain extremely unpredictable and will only be known once the conflict ends.

Israel faces an even more complex situation, marked by the overlay of two wars. The Gaza war has already cost over 60 billion dollars, while the confrontation with Iran leads to a significant increase in military expenses, especially for anti-missile defense systems. The Governor of the Central Bank of Israel estimated the economic cost of the 12-day war with Iran at 6 billion dollars. So, the cost of the war recovery will be much higher if its ongoing duration is considered. This expenditure puts significant pressure on public finances and the real economy, affecting investments and growth noticeably.

Iran, on the other hand, faces a much stronger structural constraint. Its economy is already weakened by international sanctions, inflation, and currency depreciation. In this context, war acts as a crisis amplifier. Strikes on energy infrastructure reduce export capacities, while military spending absorbs a significant portion of the available resources.

The relative cost of producing missiles, drones, and other destructive weapons becomes even heavier in a country suffering from resource scarcity due to international sanctions. Additionally, according to the Danish consulting firm Risk Intelligence, Iranian strikes targeting Israel and the Gulf countries could have caused significant material damages and victims, even if the majority of attacks are intercepted by “antimissiles” or “interceptors” – at least two per target – whose costs are prohibitive. The financial impact of the Iran war is already shaping up to be staggering.

Above military expenses or infrastructure destruction figures, the war has already caused several thousand deaths in a matter of weeks. These losses result in human capital destruction: dropouts, skill loss, psychological traumas, and healthcare system collapse. This human cost directly translates into economic repercussions. The erosion of human capital – linked to deaths, injuries, and displacement – is a major factor in long-term productivity contraction and growth potential.

To better understand these dynamics, a comparison with the war in Ukraine is insightful. While the Ukrainian conflict is characterized by massive infrastructure destruction over a vast territory, the Middle East war stands out due to its higher short-term financial intensity and more direct impact on energy markets.

This combination gives the current conflict a particularly high potential for global destabilization. Ultimately, the ongoing war in the Middle East illustrates a transition from a territorial war economy to a systemic war economy. The costs no longer only relate to military expenses or material destruction but extend to all economic and social structures. It constitutes a phenomenon of systemic destruction affecting public budgets, infrastructure, human capital, and overall macroeconomic balances.

Lastly, the war in the Middle East demonstrates a multiplier effect on global markets, particularly energy markets. While the Ukraine war led to a lasting reconfiguration of gas and oil flows, the current conflict directly threatens strategic passages (Hormuz, Bab el-Mandeb), giving it a higher short-term destabilizing potential. This geoeconomic aspect explains why some analysts consider the 2026 conflict the most disruptive for the global economy in half a century.

Another worrying aspect is the final impact of the burden. Even more so than during the first Gulf War, the initiator of the war may not be the primary payer. In the current conditions of strong American imbalances – both external (the current account) and internal (the federal budget) – and therefore, resurged and increasing twin deficits, it appears that the financial cost will necessarily have to be borne mostly by the rest of the world.