I A week in the Middle East is longer than in most other political spheres, and events have now superseded my argument from last week that a standoff between the Trump Administration and Iran could take months to resolve. It is today much more likely – and a minimum two thirds base case – in light of the very dramatic continuing U.S. military buildup in the region and President Trump’s much shorter “probably 10 days” deadline that U.S. military action against Iran will commence in the coming two weeks, if not significantly earlier. It continues, however, to also be the base case that the threshold for Iranian retaliation against global oil trade assets remain high, and that Tehran will instead likely strike at Israel and U.S. regional bases. It further seems likely that Iran’s allies among the Houthis in Yemen might also be mobilized to strike at U.S. linked targets in their vicinity.
The United States has in recent days shifted additional AWACS, E3 command and control aircrafts, inflight refueling tankers, F22s and other fighter aircrafts to the region in a magnitude that makes it hard to believe this amount of military assets can be sustained for more than a few weeks at most. A second aircraft carrier strike group is also expected to arrive in the coming days, effectively giving President Trump the possibility to strike Iran with a force not seen the 2003 invasion of Iraq as early as the coming weekend. Expanding military options and the durability of assets in the region likely provides a more valid indicator than any particular deadline President Trump discusses publicly, as the U.S. strike on Iran’s nuclear program in June 2025 also came significantly before the then issued “deadline”.
The precise timing of any strike remains unknown, as Trump for instance also has next week’s State of the Union speech in which to launch last minute diplomatic initiatives. It is also possible that Israel will directly participate in a U.S. led strike against Iran, though again nothing is confirmed at this point. What increasingly clear, however, is that Iran is facing the prospects of a very forceful U.S. lead military strike very soon, unless diplomacy produces results fast.
Negotiations between the Trump Administration and Iran appears to have gone nowhere beyond to possibly meet again in the very near future, and it is striking to listen to Vice President Vance – not known for his support for U.S. overseas military engagements – make it clear that Iran has to date failed to “recognize several of President Trump’s red lines“. This implies that the Administration will no longer accept a “narrow nuclear only restrictions deal” that does not include provisions for also Iran’s ballistic missile program and support for regional proxies. Such a broader deal though is extremely unlikely to be acceptable to Tehran, and military action hence draws nearer.
It might seem strange that the Iranian regime’s position is unaffected by the implications of the U.S. military buildup, but counterintuitively precisely the extent of America’s military advantage over Iran in any confrontation politically benefits the regime, which gains legitimacy among its core supporters for simply confronting the United States and surviving. Faced with the choice of negotiating away the regime’s core achievements in the nuclear and ballistic missile realms, or facing even a potentially significant military strike, Tehran will choose the latter in the knowledge that outright regime change will be extremely difficult to engineer via an air campaign only. Iran’s IRGC-led regime believes it has the domestic repressive power to sustain itself also after a powerful U.S. strike.
As discussed last week, fortunately precisely the regime’s belief it can weather the effects of a U.S. strike makes it much less likely that it will engage in the kind of mutually-assured-destruction retaliation against regional oil export facilities. Only a regime against the wall and with nothing to lose would take such risks. Tehran does not see itself as one such.
In summary, military action against Iran has moved closer and is much more probable in the next days or weeks at most. Appropriate geopolitical risk premia in oil prices and related markets though should be seen as contained by the high threshold for Iranian retaliatory action against regional oil export facilities.
II The Financial Times this week ran a story stating that ECB President Lagarde would step down early from her position to allow for her successor to be picked by EU leaders ahead of France’s presidential election in 2027. The story was sourced “according to a person familiar with her thinking”, or in other words a single individual who is not Christine Lagarde, also known as a rumor spread by someone else. While the national governor of the Banque de France did recently step down early to clearly allow President Macron to handpick his successor ahead of the French elections next year, there are good reasons to believe that Christine Lagarde will stay in office until the end of her mandate at the end of October 2027.
First of all, the ECB is not Banque de France and not a national institution under the sway of national politics in even the second largest euro area member state. Other euro area capitals would not appreciate that the politics of another member state so directly influenced the selection of the most important official in the independent-by-treaty ECB.
Secondly, Christine Lagarde is not the only member of the ECB Executive Board, whose term ends in 2027. Chief Economist Philip Lane’s term ends on May 31st 2027, and Isabel Schnabel’s on December 31st 2027. This means that both the German and French members of the executive board steps down, and that the only two women do, too, in 2027. As there are at present no female national central bank governors in the euro area, it will be important that at least two new female members of the executive board are nominated. Who replaces Christine Lagarde is in other words a “package deal” that affects important other ECB positions, too. And since the first position of Philip Lane must be filled by May 31st, if EU leaders were truly concerned about filling the ECB president’s position ahead of the French elections, they could simply choose to “agree the entire package” beforehand at for instance the March 2027 European Council meeting, thereby tying the hands of also France’s next president.
Thirdly, since it remains the very strong base case that neither France, who obviously with Lagarde had the ECB presidency the last eight years, or Germany which already holds the European Commission presidency, will supply Lagarde’s successor, it also the case that the two other ECB Executive Board slots that open up in 2027 will be filled by a French and a German candidate. This would also enable EU leaders to designate the French candidate as part of the package ahead of the French elections, again denying the incoming president any say in this decision.
It is unclear through who or why this story appeared in the Financial Times, and it might plausibly even be linked to Lagarde’s own possible next career move to head the WEF, upon which some doubts have recently been cast. At this point, however, it remains the strong base case that Christine Lagarde sees out her full term as ECB president, as all EU leaders will want to protect the complete independence of the ECB and retain their full joint discretion in selecting the new leadership team at the ECB without taking national politics in one member state into undue consideration.
Jacob
