George Alogoskoufis
A much shorter version of this article was published in Greek, in the newspaper ΤΑ ΝΕΑ, June 28, 2025.
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Introduction
The recent outbreak of a 12-day conflict between Israel and Iran in the Middle East has reignited global concerns about geopolitical instability in a region long regarded as a fulcrum of strategic energy interests. While the specifics of the war remain fluid, the rapid escalation of violence and its proximity to vital global trade and energy corridors has triggered economic tremors well beyond the borders of the region.
This article explores the short- and medium-term economic implications of the conflict, examining its impact on the global economy, the European Union, and Greece in particular. Drawing parallels with historical episodes such as the 1973 oil crisis and recent conflicts in Ukraine and Gaza, we assess how a brief but intense regional war can affect energy markets, trade flows, inflationary dynamics, investor sentiment, and policy responses.
1. The Global Economic Impact
a. Energy Markets and Supply Chains
The most immediate and visible effect of the conflict has been on global energy markets. The Middle East is home to more than 50% of the world’s proven oil reserves, with the Persian Gulf serving as a critical conduit for oil and gas exports. Although the conflict is not directly centered in the Gulf, its geopolitical spillover risks—especially if Iran becomes more directly involved—have led to heightened fears of supply disruptions.
Following the outbreak of hostilities, Brent crude rose sharply, briefly topping $97 per barrel before stabilizing around $93. Liquefied natural gas (LNG) prices in Asia and Europe also rose by 15–20% in futures markets. This reflects both real and perceived risks, particularly concerning the Strait of Hormuz, through which roughly one-fifth of the world’s petroleum passes. Even without direct disruption, geopolitical risk premiums have increased.
Higher oil and gas prices feed into broader inflationary pressures, especially in countries that remain dependent on energy imports. This is particularly concerning at a time when the global economy is emerging from a high-inflation period triggered by the COVID-19 pandemic and exacerbated by the war in Ukraine.
b. Global Inflation and Monetary Policy
A sustained increase in energy prices would likely delay or even reverse plans by central banks to ease interest rates. The U.S. Federal Reserve, the European Central Bank (ECB), and the Bank of England had been signaling gradual loosening in monetary conditions through 2025. The Middle East conflict may force a pause in these plans, as rising fuel and transport costs threaten a fresh wave of inflation.
Furthermore, global shipping costs have spiked due to increased security risks in the Red Sea and eastern Mediterranean. Insurance premiums for commercial vessels have increased by up to 40% in some cases, adding friction to already strained global supply chains.
c. Investor Sentiment and Financial Volatility
Equity markets reacted with caution: major indices in New York, London, and Tokyo dipped initially, although some recovered as the conflict appeared contained. Safe-haven assets—such as gold and U.S. Treasuries—saw significant inflows, suggesting increased risk aversion among investors. Volatility indices (such as the VIX) spiked, indicating market unease.
If the conflict escalates or leads to broader regional destabilization, global financial markets could see sustained volatility, capital flight from emerging markets, and a deterioration of investor confidence.
2. The European Economic Impact
a. Energy Vulnerability and Inflation Risks
Europe remains heavily dependent on energy imports despite recent diversification efforts following the Russian invasion of Ukraine. While reliance on Russian gas has been reduced, Middle Eastern oil and LNG now account for a growing share of European energy consumption—especially in southern and eastern member states.
Any disruption in Middle Eastern energy exports, or a sustained increase in prices, would affect industrial output and consumer prices in Europe. Countries like Germany, Italy, and France, whose manufacturing sectors are energy-intensive, may see cost pressures that hamper competitiveness and recovery.
The ECB faces a particularly difficult policy dilemma: how to balance inflationary risks with the need to support weak growth. A resurgence of energy-driven inflation could force the ECB to maintain higher interest rates for longer, which would weigh on economic expansion and investment.
b. Trade and Shipping Disruptions
The Suez Canal—just west of the conflict zone—remains a vital artery for trade between Europe and Asia. Though not directly targeted in the current conflict, instability in the eastern Mediterranean and adjacent areas could make shipping riskier and more expensive. European companies reliant on timely deliveries from Asia may face renewed bottlenecks, especially in automotive and electronics supply chains.
Additionally, tourism flows to the eastern Mediterranean may be affected. Although most European destinations remain safe, negative perceptions or safety concerns could reduce travel from non-European visitors to the region, affecting southern European economies.
c. Security and Refugee Pressures
There is also a socio-political dimension. Past conflicts in the Middle East have triggered refugee flows toward Europe. While the current war is relatively brief, the risk of broader escalation (e.g., Israeli-Iranian confrontation) could reignite migratory pressures. This would not only strain public finances but also inflame political tensions across the EU, where migration remains a contentious issue.
3. The Impact on the Greek Economy
Greece, as a small open economy at the southeastern edge of the EU, is particularly sensitive to Middle Eastern developments. Its geographic location, dependence on energy imports, reliance on tourism, and large shipping sector make it vulnerable on multiple fronts.
a. Energy Dependence and Inflationary Pressures
Greece imports the vast majority of its oil and natural gas. Any sustained increase in global prices directly impacts Greek inflation and the cost of living. In the immediate aftermath of the conflict, fuel prices in Greece rose by over 6%, and electricity providers warned of possible hikes in the coming months if prices do not stabilize.
This threatens to undo recent progress in controlling inflation. The Bank of Greece had forecast inflation to fall below 3% by Q4 2025, but that target now appears at risk. If inflation persists, it could erode real incomes, depress consumption, and complicate monetary and fiscal planning.
b. Tourism and Perception Risk
Tourism accounts for approximately 20% of Greek GDP. Although Greece is not directly affected by the conflict, perceptions matter. A destabilized Middle East and an insecure eastern Mediterranean could lead some tourists—especially from distant markets like the U.S., Japan, or Australia—to reconsider travel to the broader region. In 2020, a similar pattern was observed after the killing of Iranian General Qassem Soleimani, when bookings to southeastern Europe dipped temporarily.
However, if Greece is perceived as a safe alternative to more unstable destinations in the Middle East or North Africa, it could even benefit from a redirection of regional tourism flows—especially from European travelers.
c. Shipping, Trade, and Investment
Greece’s shipping sector, one of the largest globally, could be both directly and indirectly affected. Higher risk premiums, rerouting of vessels away from the Suez Canal, and volatile freight rates can hurt shipping revenues in the short term. On the other hand, increased demand for tanker services and logistical flexibility can benefit certain Greek-owned fleets.
In terms of foreign investment, increased global uncertainty may delay or deter capital flows into Greece, especially in sectors such as energy infrastructure and logistics, where long-term stability is key. If European funding mechanisms become more constrained due to broader economic slowdown, it could limit the scope for fiscal stimulus or investment incentives.
Conclusion
The recent 12-day war in the Middle East illustrates the profound interconnectedness of regional conflict and global economics. While the hostilities were relatively short, their effects are far-reaching—exposing fragilities in energy supply chains, reigniting inflationary fears, and reshaping investor and consumer behavior.
For the global economy, the key risks lie in energy prices, inflation, and financial volatility. For Europe, the war raises serious questions about energy security, industrial resilience, and the political capacity to respond to external shocks. For Greece, the stakes are more immediate: energy costs, tourism perception, shipping exposure, and fiscal policy vulnerabilities.
The full economic impact will depend on how the situation evolves—whether the conflict remains isolated or escalates into broader regional instability. Nevertheless, the crisis reinforces a critical lesson: in a globalized world, even brief conflicts can carry long shadows across continents and economies. Strategic diversification, policy flexibility, and diplomatic engagement remain essential tools in managing such systemic shocks.
Prof George Alogoskoufis 
