Yay, at last the US and Iran have signed a memorandum of understanding and the ships that were stranded in the Gulf have started to make their way out, past the Strait of Hormuz including those Iranian ships that were caught in the US blockade.
However, this is by no means a lasting settlement, more of a 60-day pause to allow for further talks. The Iranians have claimed a kind of victory, saying that the Americans only made this deal out of desperation. And given the very bombastic threats to wreak more violence from the Americans, that is probably true since there would be no need to make such threats if the Americans were confident in their position.
Instead, there is a great deal that can, and probably will, go wrong – so this is more of a pause than a resolution. For a start, the Iranians have successfully managed to include the conflict in Lebanon and will be able to accuse the Americans of acting in bad faith if the Israelis continue to attack targets in Lebanon. And the first day of planned talks has already been postponed, ostensibly because of continuing Israeli strikes. The Americans have no real leverage over the Israelis and it’s not in Israel’s interest to stop pursuing Hezbollah.
For now, the Iranians will not charge vessels passing through the Strait of Hormuz but the agreement with the Americans leaves it up to the Iranians and other Gulf states to come to a future arrangement. That could easily end with Iran and Oman agreeing to levy a charge, which will then be passed on to consumers.
All the sanctions that currently apply to Iran will be reduced in line with progress in the talks, including both those set by the US itself, and those resulting from UN Security Council resolutions. In addition, the US and its partners will set up a $300 billion fund to help rebuild Iran, though the US side claims that it won’t pay any money towards this. But the Americans will release frozen Iranian assets. All this will ultimately leave the Iranian economy in a much stronger position than it was in before the war.
The Iranians have agreed not to develop a nuclear weapon, though they have always claimed that their nuclear program was for peaceful energy purposes, which the West has never believed. So this will depend on cooperation with the International Atomic Energy Agency, or IAEA.
Both sides have also pledged not to interfere in the internal affairs of the other. This leaves the Iranian regime free to continue brutally repressing its own population, which is a win for the regime but definitely not for its people.
The agreement assumes that all the outstanding issues can be resolved in 60 days, which is a really big ask. But the biggest obstacle will be the hawks in the US who will ask what America has really achieved for the enormous cost, the huge loss of life and the damage to the global economy? On the face of it, Iran appears to have wrung quite a few concessions out of the Americans, while the conflict as a whole has demonstrated to other potential adversaries the limits of American power.
Meanwhile, the toy action man figure that identifies as the US secretary for defence Pete Hegseth is set upon eroding American power even further, once again threatening to further reduce US commitments to its European NATO allies. The Europeans are scrambling to increase defence spending while also learning lessons from the Ukraine war where cheap drones have proven more effective than expensive American missiles. Equally, Ukraine has weathered America’s withdrawal of military aid and is now less vulnerable to US pressure to settle the war in Russia’s favour.
However, the need to find more money for defence is putting pressure on many NATO economies, not helped by the economic tsunami that rippled around the world following the US attack on Iran. That impact will continue to be felt for many months, particularly around food prices because of the earlier disruption to the supply of fertiliser.
In Britain the Office for National Statistics reports that the economy shrank slightly by 0.1 percent in April due to rising costs and falling sales. Surprisingly, inflation in the UK has remained static at 2.8 percent, largely because food prices have fallen. Transport costs have risen and were expected to rise further but many analysts now hope that oil prices will fall following the apparent peace deal in the Middle East. Consequently the Bank of England left UK interest rates at 3.75 percent.
The US inflation rate has hit 4.2 percent, prompting Trump to declare “I love the inflation” though American voters may feel differently. For now, the US Federal Reserve opted to hold its interest rates steady between 3.5 and 3.75 percent though half of the bankers that advised on this have said they expect US rates to rise later this year.
Inflation in the Eurozone has risen from 3 percent to 3.2 percent, mainly due to rising energy costs. This has prompted the European Central Bank to raise its main deposit interest rate for the first time since 2023 from 2 percent to 2.25 percent. Analysts expect two further rate rises before next spring. The ECB also raised the interest rate on its main refinancing operations, which commercial banks use to borrow funds from it, from 2.15 percent to 2.4 percent. Christine Lagarde, president of the ECB, noted: “The full implication of the war for medium-term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second-round effects.”
Elsewhere the Reserve Bank of Australia held rates at 4.35 percent this week but said it may have to raise rates later in the year to control inflation.
Japan has also seen a rise in inflation, though Japanese inflation is much lower than other countries at around 1.4 percent. Despite this, the country has seen a steep rise in prices as a direct result of the US action against Iran. Consequently, the Bank of Japan raised its main interest rate to 1 percent, up from 0.75 percent, the highest level since 1995.
Coincidentally, the Japanese prime minister Sanae Takaichi travelled to London to sign a trade deal whereby Japanese companies such as Mitsubishi Estate, Mitsui Fudosan and Nomura Real Estate will spend around £9bn on UK infrastructure and financial services and a further £9bn on UK offshore wind. At the same time, the two countries have also agreed to link UK research and development as well as software expertise with Japanese manufacturing. As part of this, Rolls Royce has agreed to work with Japan’s Atomic Energy Agency to develop next-generation nuclear technologies.
A new report from the Bank of England suggests that Brexit knocked six percent out of the British economy, partly due to the Brexit settlement itself but also resulting from the years of uncertainty that surrounded the whole process. For context, an average economic depression would normally see a reduction in GDP of around four percent.
No wonder that British voters have run out of patience with the prime minister Keir Starmer. So this morning’s news that the former minister Andy Burnham has won a by-election in Makerfield almost certainly signals the end of Starmer’s leadership. There’s very little difference ideologically between Starmer, Burnham or the other potential challenger, Wes Streeting. So the contest will hinge on the changes needed in Britain’s economic priorities and particularly the approach to government borrowing. None of this will survive contact with the current reality of international banking unless the next prime minister can also make the same arguments to the other G20 leaders.
Nessan Cleary 
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