Mail & Guardian
Mail & Guardian

EU paper spells out economic gloom of war

3 min read

An EU country that fights in a war against Iraq may be allowed to relax strict rules governing the euro zone in the worst-case scenario of worldwide recession, said a confidential document obtained by AFP on Wednesday.

The European Commission study, which was presented to a meeting of EU finance ministers on Tuesday, lays out four scenarios for the economic impact of a war on Iraq:

  • Oil prices undergo a sharp but short hike as during the Gulf War of early 1991. This implies an average price for a barrel of oil of $43 in the first quarter of 2003, compared to $30 at the start of February. Such a scenario would knock 0,1% points off EU growth and add 0,1-0,2% points to inflation in 2003, the document said.

  • Oil prices stay high for months longer, doubling to an average of $57 per barrel in the first quarter of 2003. Under this scenario, growth would suffer by 0,3-0,4% points, and inflation would rise by 0,5%.

  • Oil prices go up for much longer, remaining above $35-40 per barrel ”for a few years instead of coming down already in the second quarter”. This would dent growth by 0,2-0,4% points each year for the next two-three years. Inflation could rise by 0,7% points this year, and by 0,4 and 0,2 points over

    • 2003-2004.

  • Not only do oil prices rocket, but economies crash across the board because of a slump in consumer confidence, investment, stock markets, tourism and trade. A more volatile euro-dollar exchange rate could also be expected. In this worst-case scenario, the world and EU economies tumble into recession, with 2003 growth in the euro zone contracting by 1,3-1,4%.

    • The policy response would be a challenge for governments and central banks, the paper acknowledged. Normally, interest rates would come down, it said.

    ”However, in the case of a severe, permanent oil price shock, there would be a dilemma because of an increase in inflation. Moreover, the current level of interest rates is low, not leaving much room for manoeuvre.”

    The margin for movement on fiscal policy is also circumscribed by the Stability and Growth Pact, which limits euro-zone economies to running a deficit of no more than 3% of economic output.

    But the paper said that in the case of scenario four, the pact’s ”exceptional circumstances” clause would need to kick in, allowing euro-zone governments to breach the deficit ceiling.

    Under the clause, a deficit can exceed 3,% if the economy shrinks by 2% or if the downturn is ”abrupt or leads to large cumulative output losses”.

    The pact also caters for ”an unusual event outside the control of the Member State concerned and which has a major impact on the financial position of the general government”.

    ”The key question in this context would be to what extent a war in Iraq would have ‘a major impact on the financial position of the general government’ beyond the transmission mechanism of faltering growth,” the document said.

    ”This depends on the participation in the war and the direct and indirect budgetary costs.”

    The documents was issued as debate steps up on possible changes to the much-maligned stability pact, which was agreed in 1997 in a bid to keep the euro nations on a tight budgetary leash.

    Monetary Affairs Commissioner Pedro Solbes noted last week that the EU’s Maastricht treaty allowed for the pact to be amended in ”exceptional circumstances”.

    ”If a war is not an exceptional circumstance, I wonder what is,” he said. – Sapa-AFP