Diplomacy in ruins as G7 meets on Iran

The war in Iran will present the G7 countries with one of the most important diplomatic tests in modern history.

The group, made up of the United States, Canada, France, Germany, Italy, Japan and the United Kingdom, has been under pressure during US President Donald Trump’s two terms.

However, the decision by Washington and Tel Aviv to attack Iran on February 28 and unleash a widespread wave of attacks across the Middle East and international military bases in the region will test the alliance under extreme circumstances.

France, which currently holds the G7 presidency, has called an emergency meeting to address the Middle East. Finance Minister Roland Lescure said he and his counterparts, as well as G7 central bank governors, will meet in the coming days.

Speaking to Franceinfo radio, he said: “I have spoken to several counterparts, in particular (US Treasury Secretary) Scott Bessent… to discuss the state of the situation, so that we can assess any response that may be necessary.”

The dispute between the United States and Spain will be a particular source of tension. Madrid’s refusal to allow US military access to its bases has led Trump to threaten to “cut off all trade with Spain”, while Bessent told CNBC that “the Spaniards put American lives at risk”.

European leaders have rallied around Spanish Prime Minister Pedro Sánchez in a bid to protect Europe’s sovereignty. However, each G7 nation is also navigating its own path through this international dispute.

With an election year just around the corner, France is walking a particularly risky line.

President Emmanuel Macron called the attacks led by the United States and Israel “outside the framework of international law,” while pledging to strengthen his nuclear arsenal to protect Europe, sending an aircraft carrier to the Mediterranean as a deterrent.

But the prospect of how persistently higher energy prices could affect domestic inflation at a sensitive time for the economy is also influencing Macron’s response. Finance Minister Roland Lescure, who will lead the G7 meeting, said that “in a conflict that has global repercussions, it is obviously essential that we coordinate.”

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Germany has taken a more diplomatic stance, with Chancellor Friedrich Merz saying that “now is not the time to lecture our partners and allies,” ahead of his meeting with President Trump in Washington DC last week.

However, the economic reality of a protracted war in the Middle East is already worrying Bundesbank President Joachim Nagel, who is expected to attend G7 talks this week. He told CNBC’s Annette Weisbach that “this war is a burden on the economy of Germany, of Europe and of the entire world.”

In the United Kingdom, Prime Minister Keir Starmer has been criticized for his cautious response to the attack on Iran.

Speaking last week, he said Britain’s so-called “special relationship” is “up and running right now” but stood by his decision not to join any attack on Tehran.

For his part, Trump sent Starmer a scathing message over the weekend.

“The United Kingdom, our once great ally, perhaps the greatest of all, is finally seriously considering sending two aircraft carriers to the Middle East. It’s okay, Prime Minister Starmer, we don’t need them anymore,” Trump said in a Truth Social post.

“But we will remember. We don’t need people joining wars after we’ve already won!” Trump added.

UK Finance Minister Rachel Reeves, who is expected to join the G7 meeting in the coming days, was forced to defend her Spring Statement as the “right economic plan in a world that has become even more uncertain” despite rising energy costs.

With such a complicated diplomatic landscape, markets have weathered a volatile period with their focus firmly on the energy sector. As investors prepare for more headlines in the coming trading sessions, here are some key takeaways on what to expect from the markets:

Goldman Sach: “Energy supply disruptions have led to an unfavorable combination of higher energy prices and weaker risk sentiment, with the sharp rise in European natural gas prices especially in focus for European currencies. Higher gas prices will add near-term incremental inflationary pressure on European and Asian economies, impacts on the US will likely remain limited given dependence on domestic supply.”

Barclays: “Despite rising tensions, most non-US stock indices remain near their highs, leaving markets exposed to further deterioration. If Brent crude approaches $100 a barrel due to supply concerns, the Stoxx 600 could fall about 8% to around 550.”

Deutsche Bank: “The Iran situation is currently the focus of the markets, but at least so far we are not at thresholds that have historically been consistent with a recession or a larger market decline.”