The escalating war in the Gulf, with more nations drawn in by the day, was always going to be a jolt for the global economy. As the conflict intensifies the price of crude oil has jumped to almost $95-a-barrel in latest trading.
Britain’s acute vulnerability to crisis becomes ever more obvious. Chancellor Rachel Reeves’ claims to have restored stability in Britain’s public finances looks ever more threadbare.
The yield on Britain’s ten-year bonds moved up sharply, making the prospect of cheaper home loans retreat into the distance and increasing the cost of servicing British government debt.
This might not matter were the world not in flames from Iran to Ukraine – which is in its fifth year of fighting off Russian brutality.
Britain’s ability to do much about this is severely limited by the diminished state of our once much-admired military forces and fissures in public finances.
The symbolic image of HMS Dragon still anchored in Portsmouth while an armada of Western warships is assembled in the eastern Mediterranean and Gulf region is not easily missed.
Despite Sir Keir Starmer’s raid on the development assistance budget, as part of a catch-up exercise, there is little chance of meeting Nato targets of 3.5 per cent of national income on defence by the 2030s.
No laughing matter: Chancellor Rachel Reeves’ claims to have restored stability in Britain’s public finances looks threadbare
In the coming months and years governments at Westminster, whatever their colour, are going to face a classic guns-versus-butter dilemma.
The International Monetary Fund reported this week that Western policymakers have treated government debt ‘like an elastic band that could be endlessly stretched without snapping’. Now, with public debt exceeding annual output, many countries are at breaking point.
In Britain, despite £75billion of tax increases since Labour came to office, the dial will be barely shifted, with the percentage of debt to national output rising to 96.3 per cent in 2028-29.
Unless there is a radical shift in national priorities, away from welfare and domestic spending, cash for defence of the realm simply won’t be there.
In contrast, Germany, which was constrained in its military spending after the Second World War, can ramp up its outlays and investment in weaponry and munitions – a reward for fiscal rectitude.
In 2026 it expects to spend £95billion on defence, outstripping Britain’s £63billion or so, and France.
Geographically, Germany is much closer to the European battlefront. On current trends it will be spending 3.5 per cent of national income on defence by 2029, or £216billion.
That is more than its main European competitors added together. The scene was bizarre. Donald Trump, seated next to the German chancellor Friedrich Merz, laying into Sir Keir over his timid legalistic approach to the Iran war and failing to be more like Churchill.
It represented a metaphor for the rise of a new militarised Germany. One which so alarmed Mrs Thatcher at the time of German reunification in 1989.
Aside from having the money and the willpower, Germany also has the heavy manufacturing capacity through firms such as Rheinmetall.
These are denuded skills in Britain’s fleet-of-foot service economy.
The rise of militarised Germany will not sit easily with neighbours such as Poland. Nor will it play well in the psyche of British people after two unforgettable 20th century wars. The UK has engineering, aerospace and satellite skills in abundance.
An economy skewed towards welfare spending, starving our national security apparatus, leaves the UK in a bad place.
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