The war in the Middle East – the long-term consequences

Increased Defense Spending

Despite U.S. air superiority, Iran has caused significant damage in the Gulf states and at regional U.S. bases using inexpensive drones deployed en masse. As the war in Ukraine has already shown, these weapons are becoming increasingly important. It is not only the U.S. and the Gulf states that are forced to respond and radically restructure their armed forces. This reinforces the global trend toward increased defense spending, which is already evident in 2025 in areas such as German defense spending and has been increasingly reported by defense contractors since the start of the Middle East war. NATO member states are already aiming to increase their defense spending in the narrow sense to 3.5% of GDP by 2035 in order to defend themselves more independently of the U.S. against an increasingly aggressive Russia. Western countries are likely to finance the rising expenditures primarily through new debt, as they wish to avoid cuts in areas such as social services. This increases aggregate demand, which ultimately acts as a structural inflation driver.

The Middle East Is Becoming Permanently More Unstable

The Iranian leadership ultimately emerges stronger from the war with the U.S. and Israel. While the U.S. held air superiority and was able to destroy many targets, Iran was nonetheless capable of attacking the Gulf states with drones and missiles, while also dealing a significant blow to U.S. military facilities. Furthermore, by closing the Strait of Hormuz, Iran holds enormous economic leverage.

This strength of Iran, a political troublemaker, makes the Middle East permanently more unstable. Added to this is the fact that the Middle East war escalated much more severely than the conflicts of the past two decades; in future wars, the parties involved will have fewer reservations about resorting to large-scale military force again. This makes the resource-rich region more unstable and makes renewed closures of the Strait of Hormuz more likely, which has significant economic consequences:

• The Gulf states, which were once viewed by many as the Switzerland of the Middle East, will face far greater difficulties in the future in attracting capital, skilled workers, and tourists, and in maintaining their comparatively strong growth. This undermines their plans to position themselves beyond oil production and petrochemicals as aviation hubs, in the financial sector, or in the field of artificial intelligence.
• Countries that, like the U.S., depend little or not at all on imported fossil fuels will benefit in the competition for capital and labor. Asian developing countries that import large amounts of oil and gas from the Middle East, on the other hand, are likely to face greater challenges in the future if the likelihood of supply disruptions from the Gulf states increases.

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