I In the ongoing U.S.-Iran standoff, no immediate outcome should be expected as concern for Iranian demonstrators have faded, and domestic mid-term election political considerations appears to weigh more heavily on the Trump Administration’s deliberations. The probability of eventual military action being taken remains high though.
Talks about talks continue between U.S. and Iranian officials, seconded by mediators from regional governments. There is still no decision on the scope of future talks, which Iran wants to only include potential limitations (not a complete abandonment) on its nuclear program, while the Trump Administration has on several occasions stated that also Iran’s ballistic missile program and support for regional proxy forces must be included.
These preliminary talks may take weeks to resolve, as regional mediators will insist on the necessity to find a negotiated solution, and the Trump Administration appears content with taking a wait-and-see approach while continuing to increase its military build-up around Iran.
There is no obvious deadline for these negotiations, though an indication can likely be found in the recent comment by Ukrainian President Zelensky to the Financial Times. Here he stated in reference to Trump Administration demands for elections in Ukraine by May-June this year that the Administration “want something by June” to shift the domestic U.S. political focus onto the mid-term elections. It seems a reasonable political proposition that the Trump Administration will also want to have some sort of “resolution to the Iran standoff” by the same time, to have something to show U.S. mid-term election voters from its “foreign endeavors”. In other words, the confrontation with Iran might still take months to resolve, as concerns about the fate of Iranian protesters no longer carry much weight in Washington. It is also worth recalling here that the U.S. military buildup ahead of the Venezuela operation also took months to complete, before any action war ordered.
Two main scenarios appear increasingly likely, while a third one involving a large-scale open-ended U.S. military operation against Iran with the implicit aim to undermine the regime are now extremely unlikely, despite the ongoing U.S. military buildup. Both main scenarios involve significant risks of military action taking place, though of a very different nature.
In the first “nuclear negotiations succeed” scenario, the Trump Administration agrees to sign a narrow and limited “update to the Iranian nuclear agreement”, with some new limitations on nuclear enrichment. This outcome would represent a very clear political prioritization by the Trump Administration to avoid a direct U.S. military attack on Iran in an election year. It would not yield any lasting impact on the region and would represent quite a dramatic turn around for a president, who only a few months ago boasted about having “obliterated Iran’s nuclear program”.
However, such an outcome with no policy taken against Iran’s ballistic missile and proxy support in the region would be completely unacceptable to Israel, where crucially Prime Minister Netanyahu is also on the election campaign trail. Given that it would be a certainty that the U.S. military assets amassed in the region would be deployed to protect Israel against a direct (likely ballistic missile and drone based) attack by Iran. And that we know from the confrontation last year that Israel’s air force can operate more or less uncontested in Iranian air space, it will be a high probability above 50 percent that Israel would choose to strike Iran on its own, both for electoral reasons and to degrade Iran’s especially ballistic missile production capabilities. With U.S. air defense assets deployed in the region, and Israel’s own missile defense in place, this would be a relatively low risk strategy for Netanyahu, with only a limited risk of Iran hitting important targets inside Israel.
How such an Israeli initiated renewed military confrontation with Iran would end is unclear, but the fighting would be unlikely to last longer than the 12-day air war of June 2025. This is therefore a scenario that potentially leads to a relatively short Israel-initiated military confrontation with Iran, in which the U.S. will certainly play a defensive role, but could also take offensive action directly against Iranian targets. As in other military confrontations, this scenario would not involve a material risk of Iranian retaliatory attacks against global oil trade, as attacks directly against Israel itself and possibly U.S. regional bases have far more potent domestic political impact among the Iranian regime’s hardline supporters. Moreover, a regime facing acute economic stresses are unlikely to escalate against the sector that provides it with crucial export revenue.
The second “nuclear negotiations fail” scenario would see the United States and Iran fail to reach any negotiated solution, leaving Donald Trump with the choice between striking Iran or simply sailing the U.S. armada home. In this scenario, Donald Trump is likely to order a U.S.-led military strike on Iran, though not an open-ended campaign designed to overthrow the regime in Tehran. Rather the Trump Administration is likely to design a short, but high intensity campaign against the core tenets of the Iranian regime – leaders, including Ayatollah Khamenei, ballistic missile production facilities, IRGC barracks and of course nuclear related facilities.
It is unlikely that such a campaign would lead to the undermining of the regime, or entirely “obliterate” the nuclear and/or ballistic missile programs, and it could easily draw in for instance Iran’s ally in the Houthis in Yemen and as such once again pose a threat against Red Sea shipping. Following a number of days of U.S. strikes against Iran, the Trump Administration would likely – as it did last summer following the first strikes against Iran’s nuclear program – simply declare “Mission Accomplished!” and end the campaign.
A short high-intensity U.S. campaign against Iran would dramatically and lastingly change the political situation inside Iran, but crucially this would not be the intent of military strikes. Rather they would offer Donald Trump the “least bad off ramp” from what it otherwise a potential open-ended military campaign, deeply unpopular with U.S. voters and American regional allies. As in the first scenario, Iranian retaliation against a U.S. military strike against it will with a very high degree of certainty focus on hitting back at Israel and U.S. regional bases.
Only a regime believing it faces imminent collapse would consider taking action against its own economic lifeline in the oil trade sector. And following the establishment in recent weeks of the Iranian regime’s evident capacity and willingness to kill very large numbers of Iranians to stay in power, this is not likely to be how Tehran perceives the situation. Regretfully, the extreme violence unleased against Iranian protesters will have consolidated political power inside Iran among the most radical and diehard regime supporters centred around the IRGC. For this group of regime supporters, ongoing resistance (e.g. missile attacks) against Israel and/or U.S. regional bases are likely to represent the single most important political motivation, irrespective of the damage suffered by Iran itself in any confrontation.
In sum, the U.S.-Iran standoff is likely to take several months to play out, and military action – either initiated by Israel or the United States – remains a high probability, though without large spillovers on to global oil markets.
II EU leaders this week met for an informal summit focused on “deepening the single market, reduce economic dependencies and boost competitiveness”. Not much of concrete substance should ever be expected from such informal summits, and this one as expected delivered little in terms of new policies that might make a difference for the European economy.
The need to “complete the EU Internal Market” to provide European firms with the scalable marketplace is probably the most frequently repeated mantra for how to improve EU economic performance over that last three decades. The problem, however, is that fully integrating the national economies and markets of 27 member states run up against immovable objects like language barriers (the EU has 23 different national languages). And more importantly that the EU has no or very limited jurisdiction over the most important rules and regulations covering labour markets, healthcare systems, pensions, judicial processes or taxation that actually most directly affect European firms’ growth prospects and competitiveness. Nothing at the EU level stops say France from reforming its national labour market to become more like that of Denmark, nor does anything from Brussels prevent say Spain from introducing the kind of supplementary private pension savings vehicles that would boost savings outside the banking system. Except of course the same national political obstacles that have blocked this type of structural economic reforms for decades.
Two new “buzz words” have entered the EU leaders’ speeches in recent months, namely the so-called “28th regime” and a “two speed Europe”. Neither, however, offers many prospects for material improvement of the EU’s economic growth. The idea of the “28th regime” is to create a genuine set of pan-European rules and regulations that firms could then choose to opt into, rather than operate under one of the existing 27 national regulations. This would conceptually be similar to the choice some U.S. banks have historically had between being state or federally chartered institution.
The problem, however, is that a 28th regime in any given sector can only really work if EU member states at the same time opt to create a genuinely single common daily supervisor to oversee firms operating under the 28th regime. Without such a single EU level supervisor, opting into the 28th regime would simply mean firms “opting out of national regulations” with nothing to replace it. This would be an outcome surely unacceptable to EU publics and sectoral stakeholders.
The ECB is today the single supervisor for the euro area banking sector, delegating responsibilities between itself and national supervisors. There has to date, however, been no political will among member states to replicate the ECB’s Single Supervisory Mechanism (SSM) in other sectors of the EU economy. Until that happens, a 28th regime cannot work.
The idea of a “two speed Europe” is that a smaller group of EU members can forge ahead and integrate particular sectors of their economies without having to wait for all 27 members of the EU to agree. This, however, is a concept already permeating the EU today, as not all EU members are in the euro, not are all in the Schengen Area (e.g. with access to free movement), not all are in the European Public Prosecutor’s Office (EPPO), or participate in the EU’s “Unitary patent”. And it is not evident that any given “sub-group of EU members” willing to proceed to “enhanced cooperation” will include the members with the best national institutions and regulations that should sensibly be adopted by as many EU members as possible. In short, more “two speed Europe” will necessarily mean faster EU economic progress, as the notion of “enhanced cooperation” among a smaller group of countries has always been intended to overcome opposition to new specific and narrow proposals from individual EU members, rather than be a vehicle substituting for the general lack of political will to implement broader economic reforms to for instance the Internal Market.
Lastly, German Chancellor Friedrich Merz at the informal summit made it clear that Germany will continue to oppose the general use of common debt (Eurobonds) in the EU, outside the very particular cases like for instance funding Ukraine where political imperatives for common action simply cannot be denied. Merz hence looks set to continue to oppose using Eurobonds to try to overcome the EU’s general investment deficit in the coming years.
Summing up, this week’s informal EU leaders’ summit did not mark a material strengthening in the political will to overcome long entrenched obstacles to improve the EU’s economic performance.
Jacob
