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March 3, 2003
Council on Foreign Relations
[Note: A transcript of this meeting is unavailable. The discussion is summarized below.]
1. What We Know:
The global impact of a war with Iraq depends crucially on the path of the war, and the subsequent peace. That said, a war in Iraq would have negative economic consequences for the global economy in the short-term through two channels: oil prices and uncertainty. A further rise in oil prices would act as a drag on growth and continued uncertainty would undermine business and consume confidence, thereby jeopardizing investment and spending. Most agreed that a tentative recovery in world growth had begun last year, but was vulnerable to derailment if there is a protracted, costly conflict. Participants expressed concern that systemic risk in the world has increased given the tremendous geopolitical uncertainty which could further dampen economic activity.
A number expressed concern that the tension between the United States and Europe over Iraq could spill over to other areas, such as trade.
2. What We Don’t Know:
It is difficult to predict the impact of a war with Iraq on the global economy, and on the longer-term consequences for globalization and integration. Many commented that the scenario put forward by most market analysts of a short, successful war does not take into account various unknowns and contingencies. Participants proposed a framework that would look at a range of scenarios in order to assess the economic consequences of several outcomes. Such a framework would take into account the potential for a longer-than-expected conflict, the costs and complications associated with post-conflict Iraq, the risk of terrorist attacks or the problems associated with a lack of international legitimacy if the United States were to attack Iraq without broad international support. The impact of war on global developments would be influenced by both the breadth of support for a war, and the degree of success or messiness of the conflict. The most benign scenario would be a broad coalition in support of the United States, with a relatively swift war and clean outcome. This now looked very unlikely, given the strength of opposition around the world. Some argued that legitimacy and success/messiness were linked, with a successful war likely to bring “post hoc” legitimacy. The ability of the United States to gain legitimacy and broad support for its actions will be particularly important in the long-term for both the economy and international institutions.
While there was general agreement that the prospect of war has a dampening effect on economic activity, views differed on whether recent economic weakness was due more to the prospect of war with Iraq or to other underlying vulnerabilities. There were some – but a minority -- who felt that the impact on the economy of security events, such as a war with Iraq and the impact of the September 11 attacks, had been overstated. They argued that continued weakness in the global economy can be attributed to other factors such as the build up of unsustainable excesses in the bubble years and the subsequent adjustment, and a tight oil market due to an unusually cold winter and supply disruptions from Venezuela. Others argued that the fragility of the U.S. economy combined with the weakness in the other major economies meant that the world is a lot more vulnerable to war-related effects and other shocks.
Additional factors that could undermine global growth include worries about North Korea, diminished Venezuelan oil production, and the potential for future terrorist attacks.
3. What Are the Next Steps:
Legitimacy of U.S. actions matters and therefore the United States should do more to build a coalition / obtain broader support for the war. A unilateralist approach by the United States could threaten progress on global economic integration and weaken the global economy.
Economic policy makers will need to assess continually the war's length, difficulty, and consequent effects on economic growth, and use the tools at their disposal to bolster economic growth.
A more transparent accounting of the expected large fiscal costs of the war and rebuilding of Iraq should be developed and presented.
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