Germany’s Stress Test

The outbreak of armed conflict between Iran and the United States and Israel has become a direct stress test of Chancellor Friedrich Merz's government. It is once again exposing the fragility of Germany's post-2022 energy strategy and the dilemmas of European support for Ukraine. Further, it raises the question of whether Germany can be a security provider in an era of hard conflict.

The immediate economic impact of the Iran war is being felt in energy markets. The closure of the Strait of Hormuz, through which pass roughly 20% of global oil and large volumes of liquefied natural gas (LNG), has pushed Brent Crude toward $115 per barrel and rising. Since Berlin abandoned Russian pipeline gas after Russia’s invasion of Ukraine in 2022, Qatari LNG has become a structural pillar of Germany’s energy imports, prompting the construction of dedicated LNG terminals to receive supplies from the Middle East. That dependency is now coming to the fore.

Even if direct imports from the region account for only 6% of Germany's supply, the domestic economy remains acutely vulnerable because crude oil is a globally fungible commodity. Any disruption at the Strait of Hormuz triggers an immediate spike in international benchmarks such as Brent Crude, which dictates the prices German industry and consumers must pay regardless of the oil's physical origin.

Economists are projecting that a prolonged conflict could add between 1.0 and 1.5 percentage points to German inflation by year’s end, reversing the mild deflationary trend that had only just begun to offer relief to consumers and businesses in early 2025. For small and medium-sized enterprises, a backbone of the German economy, the timing could hardly be worse. Order books that were beginning to recover are once again under pressure.

Beyond the oil price, the conflict has the potential to hit semiconductor manufacturing. Qatar supplies approximately 40% of the world's helium, a critical input for semiconductor manufacturing. With QatarEnergy declaring force majeure at Ras Laffan, Qatar’s main production site, following the recent strikes, Germany’s automotive and precision engineering sectors face a supply shock. This confronts Germany with a serious dilemma: In diversifying away from Russia, it has inadvertently constructed a new dependency. One that is now under direct military threat.

The strategic implications for Ukraine may prove to be the most consequential when it comes to the long-term fallout of the Iran conflict. Two dynamics are converging in ways that significantly weaken Kyiv's position.

First, elevated oil prices are directly replenishing Russia's war chest. Moscow's federal budget is heavily dependent on hydrocarbon revenues. At $115 per barrel, Russia receives a windfall that partially offsets the cumulative effect of Western sanctions. European governments that have spent three years attempting to strangle Russian war financing through oil price caps and import restrictions now find those efforts partially undone by a Middle Eastern conflict they did not engineer and cannot easily contain. The irony is that the more the Gulf burns, the more sustainable Russia's war in Ukraine becomes.

Second, the United States has redirected significant military attention and munitions stockpiles toward the Middle East theater. US precision munitions, including the air-to-ground weapons and air defense interceptors that are critical to Ukrainian battlefield operations, are being consumed at accelerated rates over Iranian targets. Pentagon procurement pipelines that were—albeit insufficiently—beginning to catch up with Ukraine's needs are now competing with a second active front. For Berlin, this imposes an urgent strategic question: Can European partners, led by Germany, compensate for the US diversion?

The answer to this question is likely “No”. Although European artillery shell production has increased since 2022, the continent's defense-industrial base remains structurally undersized for simultaneous high-intensity conflicts. Germany's Rheinmetall and other manufacturers are operating near capacity. The Ukraine-Iran nexus thus creates a situation in which Berlin's rhetorical commitment to Ukraine's victory is being tested by material constraints that no amount of political will can instantly resolve.

The hope that, because of the war, Iran can no longer supply drones to Russia is also not holding up. Russia is producing the Iran-licensed Shahed drones by itself already. The loss of Iranian supply should be easily compensated by Russian production.

Ultimately, the 2026 Iran conflict signals the definitive end of the German "middle path". Berlin is discovering that geographic diversification is not a substitute for strategic autonomy. As the United States’ focus drifts toward the Persian Gulf and Russia’s coffers swell with high-priced oil, Germany faces a brutal choice: It must either rapidly scale its own defense-industrial base to fill the US vacuum in Ukraine, or accept a managed retreat from its security commitments.