Illustration by KL./

By Professor of Economics, City, University of London

Israel’s prime minister, Benjamin Netanyahu, says that the most intense phase of Israel’s assault on Gaza is ending. Units of the Israel Defense Forces are being moved to the Lebanese border where there are signs that fighting with Hezbollah is intensifying.

Since the war began after the October 7 Hamas attack, citizens living in northern Israel have been subjected to almost continuous rocket fire from Hezbollah in southern Lebanon. More than 61,000 Israelis have been displaced, 28 killed and thousands of buildings destroyed or severely damaged. Thousands of acres of orchards and forest have been burned.

Directly inside Israel’s border with Lebanon, citizens are regularly forced to take refuge in bomb shelters as Hezbollah gradually extends the range of its attacks – local press noted that 50 new mobile bomb shelters were being brought in to supplement more than 120 already installed in the region. Israel has responded with attacks on Hezbollah missile sites and with assassinations of Hezbollah commanders, to little avail.

Though it is easy to conflate Hamas in Gaza with Hezbollah in Lebanon, these two organisations are very different. Hamas is a fundamentalist Sunni organisation, though sufficiently pragmatic to form alliances with its ideological opponents – whether that’s the Alawite-dominated regime in Syria (till the start of the civil war in 2011) and, more recently, with Shia Iran.

For its part, Iran is only too happy to provide Hamas with the arms and training to pursue its war with Israel, but has no direct control over its actions.

Hezbollah, by contrast, is not merely an Iranian proxy, but an extension of Iran’s Revolutionary Guard. Its leader, Hassan Nasrallah, is effectively Iran’s proconsul in the Levant. The movement is both a Lebanese political party and a militia that can call up as many as 100,000 trained fighters, making it more powerful than Lebanon’s official military.

To understand its recent behaviour, one must understand how Iran may be changing its strategy. Iran’s most cherished goal is to chase the United States from the Middle East and then dominate its immediate surroundings, particularly the Arab lands to its east. The 2003 US invasion of Iraq and toppling of Saddam Hussain’s Sunni minority government created a power vacuum that was quickly filled by Shia militias and pro-Iranian political parties.

In the long run, eliminating Israel means removing a rival power as well as America’s closest ally. There is also a theological element to Iran’s eliminationist ideology.

Ayatollah Ali Khamenei, Iran’s supreme leader, has repeatedly predicted that Israel, founded in 1948, would not reach its 80th anniversary. Nonetheless, until the night of April 13 to 14, when it launched over 300 drones and missiles against Israel, Iran avoided direct confrontations with the Jewish state.

Instead, in a policy reminiscent of that maintained by Egypt’s president, Gamal Abdel Nasser in the 1950s and 1960s, Iran’s goal has been to gradually weaken Israel through an endless war of attrition. Forcing the country to keep its reserve force permanently mobilised would undermine the economy and sap morale. To avoid direct retaliation, it arms irregular forces, such as Yemen’s Houthi rebels, to operate from their territory.

The last time Hezbollah launched a serious assault in 2006, Israel invaded and only agreed to withdraw after Nasrallah agreed to abide by UN security council resolution 1701. That stipulated that Hezbollah would be disarmed and the Lebanese Army deployed to the border. None of this was actually implemented.

Yet aside from occasional exchanges of fire, Israel’s northern border remained relatively quiet. Iran, having spent billions of dollars into building up Hezbollah, kept it in reserve as a deterrent against Israeli or US attacks on its nuclear facilities.

The calculus in Tehran now appears to have changed. As the Biden administration looks for ways to extricate itself from the Middle East and focus on the Pacific, the likelihood of a US strike against Iran’s nuclear programme has receded. In the wake of the October 7 attacks, Israel appears weaker, its government deeply unpopular and deeply divided in a way that makes strategic planning nearly impossible.

One expression of the government’s ongoing dysfunction is the determination of Israel’s finance minister, Bezalel Smotrich, to preserve “coalition funds” that prop up the government by supporting narrow sectoral interests at a time when the budget deficit is already 7% of GDP.

In May, the Governor of the Bank of Israel, Prof Amir Yaron warned that the direct and indirect costs of the war will reach about US$67 billion (£53 billion).

So far, the war in Gaza has shown the Israeli economy to be remarkably resilient to large shocks. Investors remain broadly optimistic about the country’s long-term economic outlook. But the cost of a protracted struggle in Lebanon will be far higher and place enormous strain on the economy.

Iran, meanwhile is sufficiently emboldened to have recently accelerated its processing of highly enriched uranium. Meanwhile, Nasrallah not only announced that his elite Redwan fighters are ready to invade and capture Israel’s Galilee region, but threatened to attack shipping in the Mediterranean and even strike Cyprus should the country continue to cooperate with Israel. Cyprus is an EU member where the UK maintains two military bases.

Nasrallah indicated that Hezbollah could soon extend its fire to Haifa, the country’s third-largest urban area, home to one-tenth of the country’s population, with the largest concentration of heavy industry. Haifa is also the site of Israel’s main port and naval base. An attack on Haifa would prompt an immediate invasion of Lebanon and a full-scale war.

Moreover, Hezbollah has 150,000 rockets trained on Israel, many of which can reach Tel Aviv and beyond. Aside from the physical damage and loss of life, a war of this scale would dwarf the substantial cost of the ongoing conflict in Gaza.

The impact of war on Israel will be dire and the effects on Lebanon – already effectively a failed state – much worse. Much of Hezbollah’s arsenal of missiles are buried in silos hidden in civilian areas. Lebanese villages are often located on the sides of mountain passes where Hezbollah will dig in. Given the need to get to the silos quickly, before all the missiles can be launched, a ground invasion will be necessary – but will be costly in Israeli lives, with huge collateral damage and civilian deaths.

In the event of full-scale war, Iran may also launch its own ballistic missiles again and try to overwhelm Israel’s defences. Demands for Israel to exercise restraint, as it did in April after Iran attacked it with 300 missiles, are unlikely to be heeded if major Israeli cities are being hit. It’s impossible to predict how much farther the conflict could spread from there.