Many Americans and Europeans believe that a successful war will revive growth by clearing away geopolitical uncertainties. A quick war that topples Saddam Hussein and his cronies; roots out all weapons of mass destruction; causes very few American, allied or civilian casualties; does no damage to oil facilities; triggers no instability elsewhere in the Muslim world, and leads to no additional acts of terrorism, they argue, would produce lower oil prices and give markets and economies a boost in many parts of the world.
But that scenario might be shortsighted. Even a successful war could simply substitute one set of uncertainties for another. Postwar humanitarian disasters, incursions from Iraq’s neighbors, violent civil strife and the transfer of unaccounted-for weapons to terrorists or hostile governments all pose serious risks. And Americans have not been prepared for the large number of troops that will be required for postwar peacekeeping, the length and danger of the task or the high cost of their stay in Iraq. The pressure to withdraw prematurely could jeopardize future stability in the region.
Terrorism prompted by the war is already being predicted. An attack in the United States, Europe or elsewhere would undermine consumer, investor and market confidence around the world. The drumbeat of warnings themselves could unnerve investors and retard growth. Social unrest or political upheavals in the Middle East and other Islamic nations, such as Pakistan, could have serious geopolitical consequences and create new economic uncertainties. With America tied up in Iraq, North Korea’s nuclear program could grow more threatening, with an enormous economic impact in Asia and beyond.
Even if none of these risks materializes, it is unrealistic to expect a robust recovery of world growth. For most nations, domestic economic difficulties predate the threat of this war, and cannot be blamed on war-related uncertainties. Japan has faced growth, banking and real-estate problems for more than a decade. Germany’s ills go back to the enormous costs of unification, slow and tentative regulatory reform, high wages and expensive worker benefits. Elsewhere in Western Europe a combination of high labor costs, and ponderous internal or EU regulations, have slowed growth and investment. The United States is burdened by high corporate debt, excess capacity, a decade of insufficient household savings, a growing trade deficit and deteriorating state and city finances.
Few of these problems will be resolved solely by removing geopolitical uncertainties. Barring damage to Iraqi or neighboring facilities, oil prices will fall–boosting most economies. But the collapse of Venezuelan exports, plus damage to its wells, alongside existing bottlenecks and dwindling commercial stocks will prevent prices from falling as sharply as after the first gulf war.
There is much governments should be doing beyond the battlefield to improve the situation: more short-term fiscal stimulus in the United States coupled with greater long-term budget restraint; more aggressive rate cuts by the European Central Bank coupled with bolder reforms to lower labor costs and reduce regulatory burdens in Europe, and accelerated restructuring of debt in Japan.
Growth prospects and confidence will also be improved if the United States, Western Europe and other members of the international community demonstrate that the issue of Iraq will not be allowed to divide them on economic matters. Redoubled international efforts to advance global trade negotiations, strengthened cooperation on ways to cope with potential currency disruptions and greater collective efforts to overcome health and development problems in poor nations would improve damaged transatlantic political relations and boost economic confidence. Failure to do so would further undermine both.
It is hoped that any war will be short and successful. But governments must understand that that’s when the real work begins. The humanitarian, reconstruction and peacekeeping needs of a postwar Iraq present another opportunity to rebuild relationships. Countries that did not participate with the United States and its allies in the fighting should be encouraged and be willing to make a contribution to a better economic and political future for the Iraqi people. To truly win the peace, America will need all the help it can get.
