When Shelley says in Section III of "Ode to the West Wind" that the wind awakens the Mediterranean Sea that "saw in sleep" old palaces and sweet smelling flowers, he means that .

While the Mediterranean is now awake because of the west wind, in its sleep, it saw old palaces and that had sunk and were covered with vegetation and flowers.

Explanation:

The Section III of "Ode to the West Wind" announces the arrival of autumn. Shelley says that the west wind has awaken the Mediterranean Sea but as it lay asleep, it witnessed sunken, old palaces and towers from a volcanic island off the coast of Naples. The island, Shelley refers to is in Baiae, a city in western Italy about ten miles west of Naples.