# Iran peace deal in sight, but Europe is the real long-term risk

_As the Gulf war moves toward resolution, Neil argues the bigger long-term risk to the world economy isn't China — it's a Europe whose 25-year growth record speaks for itself._

Neil Woodford · 7 May 2026 · 9 min read

![Organizers of the Venice Biennale confirmed that Iran would no longer participate in the exhibition. No detailed explanation was provided.](https://cdn.sanity.io/images/v3acfbvo/production/e4123aef9757883a3261c8159eadef69aa21104b-6570x4385.jpg?w=1600&fit=max&auto=format)

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Once again, the conflict in the Persian Gulf is uppermost in investors' and policy makers' minds. This time the obvious reason is that there appears to be a genuine chance of some kind of agreement to open the Straits of Hormuz, and to then start engagement to resolve the outstanding issues on sanctions, Iran's stockpile of enriched uranium and a potential moratorium on further enrichment. Throughout the week financial markets have gradually become more confident that resolution is in sight, despite last weekend's hostilities which threatened to reignite the conflict. At this point (Thursday) the world is awaiting Iran's official response to the US proposals which is expected to be delivered through Pakistani mediators over the next two days.

If agreement is reached, albeit that further negotiations would then follow, financial markets should continue to rise and bond yields fall to reflect the inevitability of lower oil prices and a re-evaluation of the inflation risks confronting the global economy.

Whilst not wishing to count chickens just yet, this does appear to be the end game of the conflict, even if agreement fails to materialise over the next 48 hours. If I am right on this, the world would understandably breathe a sigh of relief, and we could all go back to worrying about the things we were worrying about before the war broke out at the end of February. Right back at the top of that agenda would be the outlook for inflation (unequivocally down), interest rates and bond yields (down significantly) and global growth (improving as inflation and interest rates fall). Indeed, once the war is out of the way, I can't help thinking that the outlook might even be described as being bullish.

Now this will be very difficult for the UK's financial media to contend with given their predisposition to be so negative, but if there is ever any retrospective on what has just happened it should present an opportunity to reflect on how ludicrously panicked the media, policy makers and politicians became during the conflict. Whilst members of the establishment were wetting themselves about the doom that we all confronted, my own analysis, predicated on $100 oil remaining in place for the foreseeable future and the current gas price prevailing to the end of the year, showed inflation in the UK peaking in Q3 somewhere close to 3.5% and growth, albeit muted by the barrage of negativity, remaining positive through Q1, Q2 and Q3. Quite why this outlook prompted so many to predict up to four interest rate rises this year is beyond me. Even now, the "market" appears, still, to be expecting at least two increases in 2026.

By way of comparison, UK inflation peaked at over 11% in 2022 following the Russian invasion of Ukraine, and that inflationary shock, felt most acutely through the energy price cap, lasted until well into 2023 during which it averaged nearly 7%.

## Global imbalances

Moving on from the all-consuming war in the Gulf, on Wednesday this week my attention was drawn to an article in the FT written by Martin Wolf entitled ["Imbalances are back on the global agenda"](https://giftarticle.ft.com/giftarticle/actions/redeem/f0f188cd-7d25-4013-b1ab-0e41c9acded7) (FT Gift Link). Its publication followed a speech given by Scott Bessent, the US Treasury Secretary, at the Institute of International Finance [three weeks ago on the same subject](https://www.youtube.com/watch?v=vK8PFc0XBts). Not surprisingly, whenever global imbalances come up one immediately thinks about China's trade surplus and the US's corresponding deficit, tariffs and maybe as well, the scale of the current US budget deficit which is estimated by the IMF to reach 7.5% of GDP in 2026. Reflecting this, Scott Bessent said in his speech that "the slow-motion build-up of global imbalances after a lack of sustainable growth is the biggest risk (to the world economy)" and then added that "the world cannot take a China with a trillion-dollar trade surplus".

Now, in both cases I agree with him, and inevitably whenever imbalances are mentioned we always focus on the US and China. But there are a few important points worth making here. First, there is no realistic prospect of China changing economic course any time soon and, secondly, although it's inevitable, especially ahead of a Trump/Xi summit, that these issues are aired, no one on either side anticipates any resolution of this economic tension.

What also tends to get missed in this debate about global imbalances, however, is that in some respects the most glaring one is that between the US and the Eurozone. For over twenty years, the EU has maintained a sizeable trade surplus with the US in goods and this year it is forecast to exceed $235bn. Reflecting this long history of surpluses, the EU has now become by some margin, the US's biggest creditor far exceeding the scale of China, Japan or the oil exporting countries.

![Iran peace deal in sight, but Europe is the real long-term risk](https://cdn.sanity.io/images/v3acfbvo/production/31f777946b1cab326d7fd7796f873eadcaf44fab-1512x1508.png?w=1600&fit=max&auto=format)

As Scott Bessent highlighted, this imbalance reflects a prolonged period of low growth, but in this case in the EU economy, not in China. In fact, over the last 25 years the US economy has grown on average somewhere close to 2.5% pa, but the European economy has delivered something closer to 1.5% pa over the same period. As a result, in the space of little more than fifteen years the US economy has gone from being the same size as the EU economy (in 2008) to now being over 40% bigger, or approximately $10 trillion in GDP. More recently the growth gap between the EU and the US has widened. From Q4 2019 to Q4 2025 the US delivered a cumulative 14.6% GDP growth whilst the EU delivered less than half that at 6.7%.

In economics it is nearly always the case that when we look back, especially at policy error, it's always really difficult to prove that things would have turned out better if x or y hadn't happened. Or, more elegantly, a counterfactual. But in this case, we have something as close as possible to exactly that. Two economies, with broadly the same economic system and having broadly similar policy tools available to their leaders start in roughly the same place in 2008, and by 2025, one is 41% bigger than the other. I can think of no better proof that Europe isn't working than that.

This dramatic growth underperformance is a major source of potential global economic instability to which Scott Bessent was referring and as Martin Wolf explains in his FT piece, this is the natural product of savings and consumption imbalances.

Trade, protectionism and finance are closely linked. If a country has an extremely low share of household consumption in GDP it will also have a correspondingly high level of savings. (China's households save about 34% of their income but confront a limited welfare state in the form of publicly funded healthcare, education, pensions and other benefits. EU households save close to 16% of income despite benefitting from the most generous welfare provision in the world.) Those savings then have to be absorbed abroad and if a country is exporting savings it must also produce a surplus of tradeables. If the EU (and China) has a huge savings surplus other countries (the US) must therefore have offsetting deficits. The US is also the world's most creditworthy country and so naturally fulfils this role for China and the EU perfectly.

The problem with this disequilibrium is that it cannot go on forever and so it is not sustainable. How it ends is of great importance to the world economy and ideally should be addressed by appropriate policy action. The trouble is that most observers believe that the borrower is always at fault in these circumstances, referencing the moral superiority of the thrifty. Consequently, they advocate, in this case, the US reducing its spending and its fiscal deficits. The problem for the world economy is that in the absence of offsetting demand-stimulating measures in the surplus economies, what follows is a global recession. So, in summary, pivotally important economies like China and the EU must generate enough domestic demand to balance their own economies in order to bring about a sustainable realignment of these global imbalances.

That might be the ideal policy prescription for this global challenge but of course in the world that we confront, there is virtually no chance of China implementing the kind of policies required to bring about significantly more consumption and less saving on any realistic timeframe. (Martin Wolf says that the chances of pre-emptive action are close to zero.)

Consequently, if the world is to avoid some kind of damaging recession in the future, the EU, which is still the second-largest economic block in the world, must implement policies to bring about a growth revolution. It has the means, it understands the mechanisms, but in my opinion, it currently lacks the political will to grasp the messy and controversial nettles to get the job done. Overburdened with bureaucracy and regulation which stifle entrepreneurialism, enterprise, innovation and investment, crippled by inflexible labour markets, low productivity and excessive energy prices, it cannot deliver the necessary economic rebalancing required to deliver for its citizens and ultimately, for those of the wider world unless and until it fundamentally addresses these issues.

Mario Draghi wrote about these challenges in a 400-page paper he produced back in September 2024 entitled ["The future of European competitiveness"](https://commission.europa.eu/topics/competitiveness/draghi-report_en). It outlined 383 individual measures that had to be addressed to "restore growth" to the European Union. A measure of the urgency with which Europe's elites treated this report is reflected in the fact that nearly two years on from its publication only 11% of its recommendations have been fully implemented. I presume Mr Draghi is not impressed.

Finally, bearing in mind the dismal 25-year growth record of the EU, combined with its apparent refusal to implement any meaningful reforms that might have a chance of delivering the growth revolution that it so urgently requires, you have to wonder why Britain's incumbent PM is so keen for the UK to rejoin the organisation. The personal political upside might be tangible for a PM that seems to enjoy spending a lot of time abroad right now, but with the best will in the world, I cannot see what the economic upside is. I recognise that commenting on these issues is likely to catalyse opprobrium from those that were so incensed by Brexit in the first place, and I apologise to them for bringing it up again, but the subject of EU membership is something that will not go away.

Not only would it be a very bad idea for the UK economy to once again align itself with the sclerotic EU, but furthermore, I have to say that I can find no evidence of the economic harm inflicted on the UK economy by Brexit that is often cited by our incumbent administration and by the media who were, and still are, so opposed to it. There is none in the UK's trade figures, nor in the UK's export performance of goods and services and adjusting for the UK's uniquely awful mismanagement of the pandemic, neither is there any evidence in the UK's growth record since 2020. Having spent a lot of time looking at this issue, not just now but going all the way back to the period leading up to the Brexit vote in 2016, I remain of the view that the arguments for membership of the EU are only political and not economic. They may still be valid but if we are once again to have a national debate about this issue, please God, let it be an honest one.

## What to look out for next week

Next week, we may well be preoccupied digesting the US/Iran peace deal. I hope so. Elsewhere, it will once again be very busy from a macroeconomic perspective. There are lots of important economic announcements on both sides of the Atlantic. In the US we will see labour market data, and most importantly inflation data later in the week. Important UK releases include GDP data for March released on Thursday. I still expect to see a much better outcome for Q1 than consensus expects but whether this will lead to upgrades depends to a large extent on what happens between Iran and the US over the next 48 hours.

As for company announcements, we are back to a relatively thin diary. The quarterly results season is now over thankfully. Of some interest is an SEC proposal to allow companies to move from quarterly to semi-annual reporting that was published this week. There is a 60-day consultation period which will then be followed by an SEC decision. Not surprisingly those institutions that benefit from volatility and trading activity are generally opposed to the change. Those who suffer from excessive friction costs, basically underlying investors, should be unapologetically enthusiastic about the proposed changes.