A fundamental political shift in Iran followed by its reintegration into the global economy could boost European Union output by as much as 0.7% and deliverbns of euros in additional income, according to a study by the Vienna Institute for International Economic Studies (wiiw) and the Austrian Institute of Economic Research (WIFO).

The research, commissioned by the Initiative Neue Soziale Marktwirtschaft (INSM), models the economic impact of a post-sanctions Iran under a new government and suggests sizeable gains for both Iran and its European trading partners.

“Since the Islamic Revolution of 1979, Iran has been living under one of the strictest sanctions regimes in the world. Its population of around 93mn has been largely isolated from the West, and its economy is currently in tatters,” said Mahdi Ghodsi, an Iran expert at wiiw and one of the study’s authors, as quoted in wiiw’s press release.

“This means that the economic development potential of opening up the country under a new government is enormous. More trade, lower energy prices, and a more efficient international division of labour would bring significant gains in prosperity for Europe, as well,” he added.

However, the study was finalised before the latest escalation in the region, including Israeli and US strikes on Iranian targets and retaliatory actions by Tehran, and Ghodsi  acknowledged that “economic and geopolitical costs of this war are likely to rise rapidly”. 

Risks remain elevated, and the short-term economic consequences are clearly negative. “The shipment of oil through the Strait of Hormuz remains subject to considerable risks, even if the current blockade by Iran were to end. And there are fears that the conflict could spread throughout the region, leading to prolonged destabilisation with massive negative consequences for the global economy,” Ghodsi said.

Long-term GDP gains

In the long-term, however, according to the study’s baseline scenario, the lifting of EU sanctions alone could raise Iran’s real gross domestic product by more than 80% in the long term. Over the same horizon, EU output could expand by 0.3%, while Austria’s GDP could rise by 0.5%.

In monetary terms, the researchers estimate this would translate into additional annual income of more than €54bn for the EU and almost €2.51bn for Austria alone.

Germany’s GDP would rise by around 0.3% under the same assumptions, while Austria’s gains would be significantly larger.

“Austria has traditionally been strong in plant engineering, mechanical engineering, construction, transport infrastructure, water treatment, and environmental technology,” Ghodsi said. “These are all areas in which Iran has enormous catching up to do. In addition, Austria has already been one of the largest exporters of pharmaceuticals and medical technology to Iran.”

The structure of Austria’s export sector, the study argues, positions its companies to benefit quickly from reconstruction and modernisation efforts in Iran.

Convergence with Turkey or South Korea

The gains for Iran would be far greater if sanctions relief were accompanied by deep structural reforms, the report says. Improvements in governance, reduced corruption and stronger legal certainty could lift productivity sharply.

In scenarios where Iran’s labour productivity converges towards levels seen in Turkey or South Korea, Iranian GDP could expand by between 240% and 390%, allowing it to approach the development level of those economies in the medium term.

Under such an optimistic scenario, the benefits for Europe would also increase, with EU GDP rising by as much as 0.7%.

The study stresses that these outcomes hinge on “fundamental political change” and credible reforms addressing the concerns that led to sanctions in the first place. It does not advocate easing restrictions under the current leadership.

“Moral clarity and economic prudence are not mutually exclusive,” said Gabriel Felbermayr, director of WIFO and co-author of the study. “That is precisely why it is important to analyse possible scenarios soberly and prepare Europe for the economic consequences of political change.”

A reintegrated Iran could also affect global energy markets. As a major oil and gas producer, its return to international markets post-war could lower prices, reduce volatility and ease inflationary pressures in Europe, the researchers said.