London, 5 October 2026 — EBM Newsdesk Analysis — By Katie Winearls
On Monday, 5 October, European markets gave up early gains as worries about the energy crisis returned. Brent crude is still above $101 a barrel, more than 40% higher than before the Iran war began, and the strain is now showing in Europe’s politics. Spain’s prime minister has called a snap election after protests over living costs, and France faces fresh unrest. In Britain, diesel hit a record £2 a litre over the weekend, putting the cost of filling a typical tank at around £110, almost £32 more than before the crisis.
This is the turn that markets have feared. For months the energy shock was a story about prices, inflation and interest rates. Now it is a story about whether governments can hold on. Every European capital faces the same squeeze: households want help with bills, citizens want public services protected, and bond investors want budgets under control. Few governments can satisfy all three at once.
Spain and France Show the Strain
Spain is the clearest example. Mass protests over housing costs, worsened by high energy bills, came to a head last week when parliament rejected emergency measures to help tenants. Prime Minister Pedro Sánchez responded by calling a snap election for 29 November, with his Socialists trailing in the polls.
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SubscribeFrance is under similar pressure. Its government faces unrest over the cost of living at the same time as investors are demanding more to lend to it, after Vanguard described the country as a long-term degrading credit. Paris has little room to spend its way out of trouble.
The pattern matters for business. Political instability slows decisions, delays budgets and makes investors more cautious about Europe as a whole.
Friday’s Relief Fades
Markets had started the week hopeful. Friday’s softer US jobs report pointed to a weaker American labour market, which could ease inflation because workers have less power to push for pay rises. The news lifted Wall Street and Japan’s Nikkei, and nudged bond yields down slightly.
Europe hasn’t shared the same lift. Government bond yields remain high after the global bond sell-off, and markets are still pricing in more rate rises from both the European Central Bank and the Bank of England. In Britain, traders expect three or four more rises over the next year. With no end to the war in sight, the inflation that triggered those rate rises isn’t going away.
The Gulf Still Calls the Shots
Everything depends on the security of supplies from the Middle East. Iranian-backed Houthi fighters have attacked dozens of sites owned by Saudi Aramco, and Yemen has launched a major operation to push them back. On Sunday, another tanker was attacked in the Strait of Hormuz. If shipping companies grow more reluctant to send vessels through, supplies could tighten again, as they did when tankers first came under fire.
The G7’s coordinated release of emergency oil and fuel stocks is easing prices for now, after Washington pushed Europe to release its diesel reserves. But it buys time rather than solving anything. Every barrel drawn down thins the safety cushion for the next disruption. Europe is especially exposed after closing around 30 refineries since 2009, as we explained in our Weekend Read on diesel, which is why diesel prices have risen even faster than crude.
My Read
The energy shock has entered its most dangerous phase. Markets can price oil at $100. They find it much harder to price governments falling, elections called early and borrowing costs rising at the same time. Spain and France won’t be the last. Every European government now faces the same choice between protecting households and reassuring bond markets, and there is no painless answer while Hormuz stays unsafe. Expect more political shocks before the energy one is over.
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