The US-Israel military campaign against Iran has introduced a stagflation shock that is reverberating through the Eastern Mediterranean with particular force in three economies — Turkey, Cyprus, and Greece. While the conflict's ultimate duration and intensity remain uncertain, analysts broadly agree that none of the three benefit in net terms unless hostilities prove brief and contained. Pre-war forecasts assumed a stable, if tense, regional environment. Those assumptions no longer hold.
Three Channels, Three Vulnerabilities
The principal transmission mechanisms are well-established. Disruption to the Strait of Hormuz — the chokepoint through which roughly 20 percent of global oil flows and critical LNG volumes pass — has pushed energy import costs sharply higher. A second channel is the risk-off financial sentiment now spreading through emerging and peripheral markets, tightening credit conditions and widening sovereign risk premia. The third is a broader regional insecurity narrative already denting tourism bookings and compressing Eastern Mediterranean trade flows.
Each of the three economies is exposed to all three channels — but in distinct proportions and with very different capacities for absorption.
Turkey: Energy Import Dependency And Lira Pressure
Ankara's exposure is by far the most acute. Turkey imports roughly 90 percent of its oil and 98 percent of its natural gas. A sustained ten-dollar rise in the oil price adds approximately four to five billion dollars to the annual energy import bill — a direct hit to the current-account deficit, a fresh source of pressure on the lira, and a new inflationary push into an economy where disinflation had been a central policy priority since the 2021–2023 currency crisis.
Pre-war forecasts had placed Turkey's 2026 GDP growth in the 3.8–4.1 percent range, with inflation in the 16–21 percent band after aggressive monetary tightening. A short conflict resolving within one to two months would, under current projections, shave around one to 1.5 percentage points from growth while pushing inflation toward 25–30 percent — broadly manageable, if painful. A prolonged campaign sustaining oil above 100 dollars per barrel for more than three months could compress growth to as little as 1.0–2.5 percent while driving inflation toward the 35–40 percent range, potentially triggering a fresh cycle of monetary tightening precisely when the real economy can least bear it.
Beyond the raw macroeconomic numbers, Turkey's large tourism sector — which generated over 50 billion dollars and 55 million visitors annually before the conflict — faces a dual squeeze: regional risk perception dampens arrivals, while higher fuel costs raise airline and hotel operating expenses. Iran had been Turkey's fourth-largest source market in 2025; its effective removal is an immediate and concrete loss.
Cyprus: Fuel And Tourism In An Open Economy
For Cyprus, the war has delivered two simultaneous shocks. Refined fuel import prices in the Mediterranean have already risen by roughly ten percent for petrol and 20 percent for diesel, feeding directly into domestic inflation and eroding household purchasing power in an economy that imports all its energy. In a small, open, services-dependent economy, such a shock moves through the system with unusual speed.
The second pressure point is tourism, which accounts for a substantial share of Cypriot GDP. Early but growing booking cancellations are already being reported. If hostilities persist beyond four to five weeks into the spring and early summer season — which they now show every sign of doing — the sector faces significant stress, with knock-on effects on employment, consumption and fiscal revenues. The pre-war baseline had forecast growth of 2.5–3.0 percent and inflation around 2.0–2.5 percent. A prolonged conflict, with fuel price increases exceeding 30 percent and tourist arrival drops of up to 27 percent, would compress growth to between 0.5 and 1.5 percent while pushing inflation toward 4.0–5.0 percent — more than double the baseline.
Greece: Shipping, Energy, And Growth Headwinds
Greece's exposure comes through three overlapping channels. As a major shipping power, Greece is directly affected by disruptions to Gulf and Hormuz traffic; any sustained closure or militarisation of those waterways affects freight rates, routing decisions and operating costs across the Hellenic-flagged and -managed fleet — one of the largest in the world. On the energy side, Greece faces the same inflationary squeeze as its neighbours, complicating monetary-policy transmission within the eurozone framework at a moment when the ECB's reaction function is already under strain. On the growth side, a sustained regional instability narrative suppresses European tourist arrivals and weighs on investment decisions.
Pre-war growth had been forecast at 1.8–2.2 percent. A prolonged conflict scenario could take that below one percent, with inflation potentially reaching 3.0–3.5 percent — modest by Turkish or Cypriot standards, but a significant deterioration from what had been shaping up as a steady post-pandemic expansion. The eurozone as a whole absorbs approximately half a percentage point of additional inflation even under the short-conflict scenario, as Gulf supply disruption ripples through European energy markets.
Scenarios: The Variable That Matters Most Is Time
In a short, contained conflict with partial Hormuz reopening, the outlook is a sharp but temporary energy shock. Turkey suffers most acutely given its import dependency and lira vulnerability, while Greece and Cyprus sustain manageable blows to tourism, real incomes and growth. Markets begin to reprice risk back toward neutral within weeks.
In a protracted, high-intensity scenario with lasting infrastructure damage and sustained supply disruption, all three economies face genuinely stagflationary conditions: growth falling while inflation rises and fiscal space narrows. Turkey's currency and sovereign debt dynamics become acute; Cyprus is squeezed through its twin tourism and energy exposures; Greece's relatively more diversified structure still produces the worst growth outcome since the post-pandemic recovery began.
Every additional week past the five-to-six-week mark compounds the damage — locking in losses that cannot be recovered within the 2026 fiscal year. The three governments are watching the same map. What happens next in the Strait of Hormuz will determine how severe the bill becomes.
Artwork: Perplexity