The United States has struck a new agreement with Iran, leaving Britain and other Gulf War allies questioning the strategic value of two decades of military intervention. The deal, brokered in secret, normalises trade and diplomatic relations with Tehran in exchange for limitations on its nuclear programme. For the City of London, this is a moment to count the cost, not cheer peace. What did we actually achieve in the Gulf, if not a stable and compliant Iran?
Let us consult the ledger. The Gulf War of 1991 cost Britain roughly £4.1 billion in today’s money. The Iraq War, launched in 2003, added another £9.2 billion. To that we must add the human capital: 179 British servicemen and women killed, thousands wounded, and a generation of veterans carrying physical and mental scars. The fiscal arithmetic is brutal, but the strategic return is worse. Iran, the perennial bogeyman, now emerges as America’s trading partner, its nuclear ambitions papered over with promises.
Market watchers should note the immediate volatility in gilt yields. The ten-year gilt yield spiked 12 basis points on the news, as investors priced in a shift in geopolitical risk. Defence stocks, from BAE Systems to Babcock International, shed 3% overnight. The market is sending a clear signal: the Middle East security umbrella, once underwritten by American resolve, is now being folded. For hedge funds and sovereign wealth funds in Mayfair, this means repositioning away from Gulf exposure and towards energy independency plays in the North Sea.
Capital flight is the immediate risk. The pound sterling, already under pressure from inflation, weakened further against the dollar. The Bank of England, in its MPC meeting next week, will have to factor in this new geopolitical uncertainty. Governor Bailey must choose between raising rates to defend sterling or holding fire to avoid choking off a fragile recovery. Either way, the cost of living crisis, driven by imported energy prices, just got a fresh tailwind.
The real question for the Treasury is what this pact says about fiscal responsibility. We spent billions on wars that were supposed to contain Iran. Now America has simply switched tactics, leaving Britain holding the bag. The National Audit Office should be sharpening its pencils for a value-for-money assessment of the entire Gulf enterprise. My suspicion is that the total cost, adjusted for inflation and opportunity cost, will exceed £200 billion. That is money that could have gone into British infrastructure, education or tax cuts.
Critics will argue that the Iran pact reduces the risk of a nuclear arms race in the Middle East. Perhaps. But the market is not buying that narrative. The VIX, Wall Street’s fear gauge, climbed 8% on the day. Investors hate uncertainty, and this deal creates more questions than answers. What concessions did America make on ballistic missiles? What about Iran’s support for proxies in Yemen and Syria? The absence of detail suggests a rushed job, a diplomatic fudge that punts hard decisions down the road.
For Britain, the lesson is bitter: our allies are transactional. America pursued its national interest, leaving us exposed. The Prime Minister, in a tepid statement, welcomed the deal but stressed the importance of “robust verification”. That is diplomatic code for “we were not consulted”. The Foreign Office now scrambles to salvage influence in a region where we have spent blood and treasure, only to be sidelined.
The bottom line is this: the Iran pact marks the end of an era. The Gulf War coalition is dead. Britain must rethink its military posture, its defence spending, and its reliance on American guarantees. The market will punish those who cling to the old certainties. Fiscal hawks like me will watch the Treasury’s autumn statement for any sign of a new strategic direction. If the government doubles down on defence without a clear objective, expect another spike in bond yields and a further slide in sterling.
In the City, we deal in returns. The returns on our Gulf adventures are now clearly negative. It is time to cut losses, recalibrate, and find new investments. That means a foreign policy based on trade, not tanks, and a budget that balances the books for the next generation, not the last war.
