Fitch says Europe faces uneven ability to absorb Iran conflict-driven energy shock

Western European governments face widely uneven capacity to respond to energy shocks from the ongoing Iran conflict, Fitch Ratings said Thursday, warning that high debt and fiscal deficits could constrain stimulus efforts.

“Belgium, France and the U.K. — all carrying debt above 100% of GDP and high deficits, have less headroom at current rating levels, while sovereigns with low or declining debt retain more headroom,” said Jan Friederich, managing director and head of Europe, Middle East and Africa sovereign ratings at Fitch.

Spain has been the most proactive, introducing measures totaling 0.3% of GDP. Italy, despite moderating deficits, faces limits due to high debt and financing costs, while the Meloni government’s fiscal discipline further restricts stimulus capacity. The U.K. is under particular pressure, Friederich said, citing rising financing costs, a high rating and political constraints that make fiscal consolidation more difficult.

Across Europe, the Iran conflict adds to preexisting expenditure demands, including defense, aging populations, climate initiatives and debt servicing. Fitch expects most governments to adopt targeted support measures rather than broad-based spending, contrasting with responses to last year’s Ukraine war-driven energy shock.

Fitch’s scenario assumes the Strait of Hormuz will remain effectively closed for roughly five months, longer than the previously expected one-to-two months, with reopening anticipated around July 2026. The rating agency expects Brent crude prices to hold at $100–$110 per barrel during the closure before falling sharply to about $70 per barrel by September as OPEC approaches maximum output and non-OPEC supply rises by roughly 3 million barrels per day.

In the Gulf Cooperation Council (GCC) region, most sovereigns have shown resilience, though Qatar and Ras Al Khaimah have been placed on Rating Watch Negative following a strike on Qatar’s Ras Laffan LNG facility. Oman is a notable exception, benefiting from higher oil prices as its exports bypass the Strait of Hormuz entirely.

Saudi Arabia and the UAE are supported by pipeline flexibility and elevated oil prices, while Kuwait is more exposed due to reliance on the Strait of Hormuz. Bahrain, rated B, is leaning heavily on peer support, including a $5.3 billion swap line from the UAE. Fitch highlighted potential risks from a ground invasion of Iran or attacks on regional energy infrastructure, as well as the possibility that recurring conflict could alter medium-term regional fiscal dynamics.