Background and Relevance of Key Figures
In November last year, I predicted that Israel would likely attack Iran’s nuclear and military facilities, potentially even eliminating the regime’s top military and political leaders. This stance was widely supported across Israel’s political spectrum, including critics of Prime Minister Benjamin Netanyahu from the center-left. These moderate leaders, such as Benny Gantz and Yair Lapid, criticized Netanyahu for his leniency towards Iran, which they viewed as an existential threat due to its progress in developing nuclear weapons.
The Inevitable Conflict
Despite internal divisions within Israel regarding the Gaza war, there was a broad consensus that Iran posed an existential threat by nearing nuclear weapon capabilities. This led to the inevitable conclusion that Israel would take action against Iran. By October 7, 2023, Iran had destabilized the region by supporting Hamas, Hezbollah, Yemen’s Houthis, and Shiite militias in Syria and Iraq against Israel. Following the destruction of these allies by Israel and Iran’s loss of strategic deterrence, the only option left for Iran was to acquire nuclear weapons—an unacceptable outcome for Israel and the West. Consequently, Israel launched an attack on Iran, with the US intervening to destroy Iran’s reinforced nuclear facilities despite anti-intervention sentiments among President Donald Trump’s base.
Iran’s Response and Regional Impact
Iran retaliated with missile strikes against Israel and now threatens US forces in the region. However, the regime is so weakened that it can barely defend itself, let alone deploy its limited arsenal against US forces. While some Shiite militias might attempt attacks on well-defended US bases and troops in the region, the risk of more forceful US and Israeli counterattacks limits their potential damage. Iran’s ability to disrupt the Strait of Hormuz, sabotage the Persian Gulf, or attack energy production and pipelines of its Arab neighbors is now constrained. The regime’s focus has shifted to survival, but its collapse within the next few months seems likely.
Economic Deterioration and Regional Implications
Iran’s regime has long financed terrorist groups in the Middle East and destabilized states across the region, including Yemen, Lebanon, Syria, Gaza/Palestine, and Iraq. The stabilization and recovery of failed states in the Middle East now necessitate a regime change in Iran. The Iranian people, not external forces, will drive this transformation next year, as they have repeatedly chosen moderate leaders over theoconic fanatics in past revolts.
Although the recent conflict has led to temporary opposition unity against the regime, a significant majority of Iranians who despise their regime—responsible for the country’s economic ruin and now geopolitical and military collapse—will rise against it. In 1990, Iran’s per capita GDP was nearly equal to Israel’s; today, it is less than a fifteenth. Iran’s energy reserves rival or surpass Saudi Arabia’s, but it has squandered hundreds of billions in potential energy revenue through an unwise war against the West for the past five decades. Now, Iranians face hyperinflation, plummeting real incomes, widespread poverty, and even famine—not due to US and Western sanctions but from the regime’s absurd policies. A nation that could have been wealthier than any Gulf oil state is on the brink of bankruptcy due to corruption, incompetence, and strategic folly.
Global Economic Impact
Financial markets correctly bet that the global impact of this recent war will be minimal. Oil price fluctuations, US and global stock indices, bond yields, and currency movements suggest that a significant stagflationary shock from severely disrupting Persian Gulf energy production and exports remains a distant risk rather than a baseline scenario.
Unlike the 1973 October War and Iran’s 1979 Islamic Revolution, which triggered massive oil price hikes fueling severe stagflation in 1974-75 and 1980-82, this time is likely different due to lower energy consumption and production in oil-importing economies, the emergence of major non-OPEC energy producers like the US, and Saudi Arabia’s and others’ capacity to leverage production overhang and inventories.
Should oil prices rise due to increased US involvement creating new risks, various macroeconomic policies and tools can mitigate stagflation’s impact.
Consequences for Regional Stability
A nuclear Iran would have threatened not just Israel but also Sunni regimes in the Middle East, neighboring Europe, and ultimately the US. German Chancellor Friedrich Merz echoed what many global leaders think but don’t publicly admit: “Israel is doing our dirty work for us.” Even Iran’s allies, China and Russia, have shown restraint.
Radical forces destabilized the Middle East for decades, causing collateral effects—through terrorism, failed states, and mass migration—in Europe and the West. Now, Israel had to weaken and destroy the radical Shiite forces and their allies. The anticipated collapse of Iran’s regime is expected to promote regional stability and reconstruction, enabling diplomatic relations normalization between Israel and Saudi Arabia. A more peace-oriented Israeli government and a two-state solution for Palestinians could then become possible. However, for this to happen, Iran’s radical regime must be replaced by a rational one eager to reintegrate into the international community rather than attack it.
About the Author
Nouriel Roubini is a senior advisor at Hudson Bay Capital Management LP and an emeritus professor at New York University’s Stern School of Business. He is the author of Mega Threats: Ten Dangerous Trends and How to Avoid Them (Little, Brown and Company, 2022).
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