HTTP://WWW.STOPNATO.ORG.UK ---------------------------
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1031119366642&p=1012571727172 Financial Times September 17, 2002 Attack on Iraq threatens to land blow on world economy By Christopher Swann US brinkmanship over Iraq is fuelling fears that economic history will repeat itself. Both within the US and abroad, economists are pointing to the negative impact of the 1990-91 Gulf war on the US economy. Back then, a burst of high oil prices and a blow to consumer sentiment was all it took to push an already fragile economy into recession. The economic fallout from the war cost the first President George Bush his job and deepened a recession that ultimately affected most of the world. With war looming once again, the debate about the direct cost of attacking Iraq has heated up in the US. A private Pentagon estimate puts the cost at $50bn (�32bn) - less than the $80bn the US and its allies spent evicting Iraq from Kuwait in 1991. Lawrence Lindsey, head of the White House's National Economic Council, is less optimistic, predicting the price could be $100bn-$200bn. Paul O'Neill, US treasury secretary, yesterday brushed aside such concerns, saying the US economy, although fragile, could bear the financial cost of whatever action it chose to take against Iraq. "Whatever it is that's finally decided to be done, we will succeed and we can afford it." But, as in 1991, the real cost of any war for the US is likely to be more than simply a widening of the fiscal deficit. International leaders are signalling growing alarm about the impact of a US-led attack on Iraq, not just on the US but on the broader world economy. European Union finance ministers meeting in Salzburg, Austria, yesterday expressed fears that a war risked undermining consumer and business confidence worldwide. "It has been quite resilient to a series of shocks . . . youdo not know what another would do," Caio Koch-Weser, Germany's deputy finance minister, said yesterday. The economic backdrop is remarkably similar to how things stood in August 1990, when Iraq invaded Kuwait. By the time of the Iraqi attack, steep increases in US interest rates by the Fed had succeeded in cooling an overheating economy. US growth had slowed from 4 per cent at the end of 1988 to less than 1 per cent. Consumers were cutting back their spending. Confidence was further shaken by the US savings and loans crisis, which forced the government to spend billions of dollars bailing out of bankrupt mortgage lenders. The oil price rise could not have come at a worse time. Michael Boskin, chairman of the president's council of economic advisers from 1989-93, warned President Bush that the economy would sink into recession. "It was clear ...the rise in the oil price and the general uncertainty was too much for the economy to bear," says Mr Boskin, now a professor at Stanford University. "Uncertainty about how long the conflict was going to last meant that delayed a rebound in capital spending and consumer spending also slowed modestly." This time, as the US attempts to crawl out of recession, much investor faith is being placed on the ability of the US and Saudi Arabia to contain the oil price. Some warn this may be misplaced. Although Opec is thought to have 25 per cent spare capacity, a surge in the oil price may be hard to avoid. Talk of an attack on Iraq has been enough to push Brent crude to $29 a barrel, a 45 per cent rise this year. Nor could the US strategic petroleum reserves - intended to insulate the economy from a disruption to supplies - do much more than moderate a rise in the oil price, says Andrew Oswald, professor of economics at Warwick University. "The reserves are tiny by the standards of world consumption and would not contain the oil price in the event of a full blown conflict in the Middle East." If anything, economists say, the US may be taking a greater economic risk by invading Iraq now than it did in 1991. For one thing, the Fed has less ammunition to deal with any resulting slowdown. Several US banks are predicting that the Fed funds rate will have to come down from 1.75 to 1 per cent by the end of the year, simply in order to offset current economic weakness. In the early 1990s, the Fed had more flexibility, cutting interest rates from 8 per cent in August 1990 to 4 per cent by the end of 1991. That the strategic stakes are higher this time increases the economic risks, according to Paul Donovan, global economist at UBS Warburg. "The more ambitious goal of dislodging a regime rather than simply evicting it increases the risks," he said. "A desperate regime is more likely to take desperate measures." Uncertainty about the duration of the conflict would have damaging consequences. Finally, if the US fails to put together a solid coalition to act against Iraq - as it achieved in the first Gulf war and more recently with Afghanistan - it would increase the financial burden on Washington. In 1990-91, US allies paid for 80 per cent of the $80bn cost of the conflict. This time, the US may have to foot the bill alone. Any extra government borrowing threatens upward pressure on interest rates. "Taking everything into account war with Iraq would almost inevitably mean a double-dip recession for the US," says Stephen Roach, economist at Morgan Stanley. "The question is whether this is a price the US is willing to pay for its strategic objectives." __________________________________________________ Do You Yahoo!? Yahoo! Finance - Get real-time stock quotes http://finance.yahoo.com --------------------------- ANTI-NATO INFORMATION LIST ==^================================================================ This email was sent to: [email protected] EASY UNSUBSCRIBE click here: http://topica.com/u/?a84x2u.bacIlu Or send an email to: [EMAIL PROTECTED] T O P I C A -- Register now to manage your mail! http://www.topica.com/partner/tag02/register ==^================================================================
