The news from Gaza this morning is grim but not surprising. Prime Minister Benjamin Netanyahu has ordered the Israel Defence Forces to extend their control over 70% of the strip. This is not a precision operation. This is a land grab dressed up as security. The UK government, ever the voice of reason from the sidelines, is pushing for civilian protection. But protection from what? From the inevitable consequences of a military occupation that the Treasury here would call a 'costly overreach'.
Let us look at the maths. A 70% occupation means 70% of the population is now under direct military rule. That is not a recipe for stability. It is a recipe for a long term insurgency. The market, if it were pricing this conflict, would be betting on higher volatility, not lower. The analogy is simple: when a company takes on too much debt for an acquisition that promises synergies but delivers only integration headaches, the share price falls. Here, the 'share price' is the prospect for peace. And it is falling.
The UK's push for civilian protection is laudable but it is a bit like asking a bull to be careful in a china shop. The IDF has a job to do, and that job is to eliminate Hamas. But the cost to civilians is mounting. The UK Treasury, with its focus on fiscal responsibility, would note that rebuilding Gaza will require billions. And who will pay? The same taxpayers who are already stretched by inflation and gilt yields that are anything but stable.
Netanyahu's strategy is a gamble. He is betting that total control will bring security. But history tells us that occupation breeds resentment. It also breeds capital flight. Not of currency, but of human capital. The brightest and the best will leave. And what remains is a population that is dependent on aid and resentful of the occupier. That is not a sustainable economic model. It is a drain on resources, both for Israel and for the international community.
Central bank policy in this region is irrelevant. There is no central bank in Gaza. But the Bank of Israel will be watching. Inflation is a concern everywhere, and a prolonged military engagement will only add to the pressure. The shekel has been stable, but for how long? The bond market is not pricing in a long war. Maybe it should be.
The UK's role is that of a concerned shareholder in a company that is making a bad strategic decision. They can advise, but they cannot control. And the market knows this. The real story here is not the 70% figure. It is the long term cost of this decision. And that cost, like inflation, will compound over time.
In the City, we would say that this is a 'value trap'. The short term gains of security are tempting, but the long term liabilities are enormous. Netanyahu is doubling down. And the market, as always, will have the final say.
