When you talk about tail risk for the US economy, sweeping away the European crisis and the fiscal cliff, perhaps the biggest potential comes from an oil price shock. Combined with any fiscal tightening, that could easily snap the US into recession. And the biggest threat of this stems not from the protests outside US embassies but an escalation of the situation in Iran, particularly from a potential Israeli strike on their nuclear facilities. However, the volatile nature of the Arab uprising could draw Iran into conflict with the West as well, with sharply negative consequences.
Here’s Iran poking the West by both confirming the Iranian presence in Syria and warning of retaliation in the event of attack:
Iran has confirmed for the first time that forces from its revolutionary guards corps (IRGC) are in Syria helping Bashar al-Assad’s government crush rebels, and warned that it would get involved militarily if its Arab ally came under attack.
In a clear public signal of Tehran’s continuing support for Assad, the commander of the Islamic republic’s elite military formation said that a number of members of the IRGC’s Qods force were in Syria, though General Mohammad Ali Jafari gave no further details and claimed this did not constitute “a military presence” [...]
Iran is said to have been dismayed at the heavy-handed way its long-standing Arab ally responded when the unrest began in March 2011, contrasting it with the more sophisticated response to protests that followed its own disputed presidential election in 2009.
“If Syria came under military attack, Iran would also give military support but it … totally depends on the circumstances,” AFP reported Jafari as saying at a rare press conference in Tehran.
I agree with Digby that the fact of tens of thousands of Muslims dying in Syria in an uncontrolled slaughter suggests that the Obama Administration hasn’t suddenly become a group of liberal interventionists all of a sudden. They have made case-by-case determinations, and they believe that Syria offers no upside and large amounts of risk. The inclusion of Iran into the mix, however, changes the dynamic, as does this clear provocation. Iraq’s Vice President, who was convicted in absentia on terrorism charges, claims that Iran uses Iraqi airspace to ferry supplies to the Syrians, and Iraqi groundspace to facilitate the flow of militias into Syria. If you intervene in Syria, then, you provoke a regional war, and even Iraq may form part of a bloc with the Iranians and the Syrians. That makes intervention even less likely.
But it has not stopped a planned military exercise that is similarly provocative on the part of the West. Naval ships from around the world have squeezed into the Persian Gulf this week for one of the largest set of military maneuvers in history. That kind of gunboat diplomacy doesn’t come out of nowhere. The US Navy claims it’s about mine detection. Mm-hm.
If you’re looking for what would sink the economy, this is it. But while the Obama Administration certainly wants to hold off on tangible military action from anyone, especially Israel, until after the election, that doesn’t mean that the belligerence and provocation has left the scene.