In a blunt intervention that has rattled Whitehall, US Vice President J.D. Vance has publicly condemned Benjamin Netanyahu’s leadership, accusing the Israeli Prime Minister of prolonging the Gaza conflict for political survival. The remarks, delivered during a closed-door briefing that leaked to the press, come as British diplomats intensify shuttle diplomacy to prevent a broader regional conflagration.
Vance’s salvo is a gift to the markets: uncertainty. The pound sterling has already slipped 0.3% against the dollar as traders price in the risk of a US-Israel rift. Gilt yields edged up, with the 10-year benchmark touching 4.12%, reflecting a flight to safety that is anything but safe for the Exchequer’s borrowing costs. The fiscal arithmetic is brutal: higher yields mean higher debt service, and the Chancellor’s headroom is already thinner than a bond trader’s margin.
The Foreign Office is now scrambling. Sir Tim Barrow, the Prime Minister’s envoy, was seen entering the Dorchester Hotel for an unscheduled meeting with an unidentified Israeli official. The brief was clear: prevent a repeat of the 2010 crisis when a US vice president’s criticism of a foreign leader sent shockwaves through the diplomatic circuit. But this time the stakes are higher. Israel’s economy is bleeding. The shekel has lost 8% this year, and Tel Aviv’s borrowing costs are spiralling. Netanyahu’s government, already haemorrhaging support, now faces a vote of no confidence.
For London, the calculus is simple. Any instability in the Middle East drives up oil prices, stokes inflation, and forces the Bank of England to keep rates higher for longer. The MPC hawks will be sharpening their talons. Meanwhile, UK exports to Israel fell 12% last quarter, and any further deterioration will hit the trade deficit. The Chancellor will be watching the currency markets with a glass of claret and a growing headache.
Vance’s remarks are also a reminder of the new unpredictability in Washington. The Biden administration has been awkwardly allied with Netanyahu, but the Vice President’s intervention suggests a rift at the top. For the City, that means one more variable in an already volatile equation. The VIX index, Wall Street’s fear gauge, spiked 1.2 points this afternoon.
The British diplomatic efforts are noble but perhaps quixotic. No amount of tea and sympathy can paper over the cracks in Netanyahu’s coalition. The man is fighting for his political life, and a US vice president has just thrown a punch. The result will be a more erratic Israel, more bloodshed, and more headwinds for the global economy. For the UK, that means only one thing: brace for a bumpy ride in the gilts market. The bottom line is that peace is the best fiscal stimulus, and we are not getting any.
