An online Q&A with Cliff Taylor, Economics Editor, and Jim Power, the chief economist with Friends First on the economic consequences of the Iraq crisis.

Question:
You may be aware that the US has been contemplating taking a WTO case/introducing trade sanctions against the European Union over the issue of GM foods. Since France is the EU Member State with the strongest views against GM foods, is it not likely that the Bush Administration will introduce trade sanctions against the EU after the Iraqi War thereby precipitating a major Trade War between the US and EU, with major consequences both for the European economy and the international trade rules underpinning the WTO ?? Raymond O' Rourke

Answer:
Cliff: I think you're correct that the outlook for trade issues could be seriously affected by the diplomatic fall-out from the war. I say "could be" because how deep and serious the fall-out will be between the US and France remains to be seen . Some French industry leaders have been quoted as saying that despite the politics, it is " business as usual." However reports from the US of "French fries" being replaced by " freedom fries" suggest otherwise.

It would be a major step for the US to suddenly start taking an aggressive approach on trade issues in the immediate aftermath of a war. However it could happen. And certainly the outlook for the Doha round of trade talks now underway under the aegis of the World Trade Organisation must be affected. For example, in the key area of farm trade, the US and France are key players in the talks, with the US pushing for restrictions on the Common Agricultural Policy and France trying to persuade the EU negotiators to fight to retain as much as possible to benefit its farmers ( and Ireland's its must be said.)

What chance a compromise in this area in the wake of the diplomatic bitterness now evident? So while a major trade war may not be in prospect, I think the danger is of a failure of the Doha round and a gradual slipping in the move to free trade which has underpinned world growth over the past fifty years.

Question:
The stock market in the US rose by close to five per cent on Monday following the revelation that President Bush was to issue an ultimatum to Saddam. Why is this? Is it a sign of recovery or an indication that the markets like conflict? Terry McLure

Answer:
Jim: The one thing that markets and investors hate is uncertainty, be it political or economic. For the past three months the markets have been waiting and wondering if Bush would go into Iraq. Monday's ultimatum signaled that the period of waiting was about to end and that the war was about to begin. This came as a relief to markets, not because they like conflict, but rather because the beginning of the conflict would remove a major source of uncertainty. In markets, when uncertainty goes up, markets go down and vice-versa.

Monday's ultimatum removed one piece of uncertainty and markets breathed a sigh of relief, but I believe that this sense of relief is only a temporary phenomenon and that it does not signal a sustained recovery. There are still huge economic problems in the US and at a global level and an attack on Iraq will not solve these problems. The imbalances left after the bursting of a bubble take some time to eradicate and will impact on economic activity and markets for another 12 to18 months. Furthermore, attacking Iraq has the potential to open up a huge and potentially uncontrollable can of worms in the whole region. Once war starts, the markets could jump by up to 20% depending on the newsflow from Iraq, but in the cold light of day, reality will strike home and that rally will prove difficult to sustain.

Cliff: I agree with Jim that a period of market volatility is in prospect. The markets currently appear to be starting to price in a quick war with no complicated or economically dangerous fall-out. Life is currently this straightforward. So expect more swings in prices in the weeks ahead.

Question:
Longterm, will this war bring more or less stability to the financial markets? Conor O'Dea

Answer:
Jim: Long-term I believe that the markets will have to live with the legacy of the bursting of the US IT and economic bubble, and a radically changed global geo-political environment post 9/11. The Iraqi war will not end the global terrorism threat and arguably will increase it. So in word, no, i don't believe that the war will bring more stability to financial markets, in fact quite the contrary. What will Bush do about Iran, Syria, Saudi Arabia etc? Imposing US style 'liberal democracy to those countries would logically result in the rise to power of more powerful Islamic fundamentalist forces and make life even more difficult for the US.

Question:
Do you think a sustained war in Iraq would have any negative impact on American companies who have major investments in Ireland and, if so, how badly do you think the Irish economy would suffer? Kenneth Lang

Answer:
Cliff: The war and the fall-out from it is bound to have some impact on US companies based here. Of course they will suffer from any wider fall-out for the US and world economies. Most are also quoted companies, so their fortunes rely to an extent on the markets and many have recently suffered from falling share prices. In turn this has put investment on hold and this has contributed to a fall-off in job creation here. This environment of nervous markets and investment plans on hold is unlikely to lift until the war is over and even then it could be disrupted by the political and diplomatic fall-out.

The US companies based here will hope that a gradual international recovery will get underway towards the end of this year.

However I think that the major influence on US investment here will be the competitiveness of the economy. We clearly face new competitors for international mobile investment in Eastern Europe and the Far East and this puts pressure on industry here to move into higher value and research based areas in the years ahead and on policymakers to put in place an environment that allows this to happen.

Question:
Any chance of our Beef money back? Conor O'Dea

Answer:
Cliff: The US forces might stumble across it on the way in.

Jim: You would need to look elsewhere for that particular money.

Question:
Will Bertie's backing of the war ensure that Irish companies will be up for consideration when the US is doling out the reconstruction of Iraq contracts? Conor O'Dea

Answer:
Jim: In my view, Bertie's backing of the war will do nothing to improve the prospects of Irish companies getting a slice of the action. Bush's buddies in Texas and a few of Blair's cronies will take the major slice of that particular cake. Bertie will get a few crumbs off the imperial table, but then again that should keep him happy and it also guarantees another good photo-op next March 17th in the White House. Hope that doesn't sound too cynical, but I am.

Question:
A quick question that is of great relevance to all mortgage holders. Will tomorrow's war depress world economies and thus push interest rates lower or will it instead have an inflationary effect (rising oil prices and cost of doing business) thus requiring higher interest rates to dampen such inflation? Obviously one has to express a view for the short, medium and long term of a protracted war. John Lacy

Answer:
Jim: Back in 1974 and 1979 in the aftermath of two oil crises, global central bankers increased interest rates to prevent higher oil prices from leading to higher inflation. This time around, the situation is very different, in my humble view. Firstly inflation is much lower coming into this crisis than on the 2 previous occasions. Secondly the world economy was already in deep trouble coming into this crisis. The net result is that higher oil prices will have a greater and more negative effect on an already very weak global economy, than on inflation. Central Bankers will now be forced to work more aggressively to reflate the world economy.

Obviously, the duration of the war and the longer that oil prices stay high, will be important considerations. I think it will be a short war and within three months or so oil prices will have come back. Regardless of duration however, the European economy, led by Germany, will remain very depressed for many reasons apart from the war and these problems are not going to go away. Over the coming months I believe the Bank of England will cut rates by up to 0.5%, the Federal Reserve by 0.25%, and the ECB by at least another 0.5%. Looking out longer term, I believe that the euro zone (including Ireland) will remain a very low interest rate environment, dominated as it is by a German economy that is in long-term decline. Good news for Irish borrowers, but bad news for savers.

Question:
There's a bit of debate about whether this is a good time to get into the stock market. What do you think? - Greg

Answer:
Cliff: I don't think it's a market in which investors will soon again be able to make a "quick buck", as was the case in the mid-1990s. Share valuations have obviously fallen back considerably over the past three years. However they are still not a raging "buy" by historical standards, particularly in the US. The risks of the current situation and its fall-out are likely to keep markets volatile over the next couple of months. Over the past week and a half, for example. we have seen serious falls, followed by a strong recovery in prices.

For those taking a longer-term view - five years or more - it may now be time to start looking at investment opportunities. Given the post-Enron market nervousness about company accounts and reported profits, stock selection will prove crucial. Shares in good solid profitable and growing companies are bound to prosper in the long-term, but the market will punish any company suspected of any financial "rinky-dinks" and will take with a grain of salt projections of profits in the years ahead from those currently in the red. Profitability and cash-generation will be the order of the day for investors.

Question:
To what extent, if any, is the US/Iraqi crisis being used as an excuse for long-term under-performance in the equity markets, pre-dating 9/11? Would a swift American victory - assuming it triggered no wider geopolitical instability in the short term - herald any lasting recovery? Breffni O'Rourke

Answer:
Jim: The Iraqi conflict is just one factor, out of many others, that is undermining the performance of equity markets. The other factors include the legacy of the US economic and IT bubble that burst with such dramatic effect in 2000, the dramatic under performance of Europe led by Germany, corporate accounting scandals and a loss of credibility in the activities of some investment bankers, and a serious destruction of corporate profits. Overlying all of this has been a dark geo-political cloud since 9/11.

A quick and 'successful' war in Iraq would remove just one of these many other issues. All of the other issues will have to be addressed and rectified in time and I believe that this process will take a couple of years. Over that period, the many economic and financial imbalances will have to be worked through and this will entail difficult and volatile market conditions. Despite what most stockbrokers will tell you, when a bubble bursts, life does not return to normal the following morning. Furthermore, despite the sharp decline in markets over the past three years, many stocks are still expensive, but some are reasonable value. Unlike in the 1990s, skillful stock selection will be very important over the next couple of years. The era of the monkey is over!

Do you think the French economy will suffer the wrath of the US as a result of the stance taken by its politicians in the build up to war? Clarissa Sweeney

Answer:
Cliff: I think that the fall-out for economic relations is very difficult to predict. Tony Blair told the Commons yesterday that what was going on would shape the pattern of international politics for the next generation. And international politics will obviously be a key determinant for economic relations, though not by any means the only determinant.

It is difficult to see the US taking an aggressive approach to damaging the French economy through, for example, trade sanctions or the like. However discussions in forums such as the World Trade Organisation and the International Monetary Fund will become more difficult. And if France - or Germany - starts to complain about the impact of a weak US dollar on their economy, it is difficult to see the US authorities getting too worried. There could also be some impact on trade in the short term- perhaps higher profile French products will find it more difficult in the US market.

Jim: In the short-term yes. In the longer-term no. The profit motive that drives the US model will ensure that once the war is forgotten, if investment in France makes economic sense (hardly likely), then US companies will invest there regardless. The attitude of US citizens towards French wine is a good excuse to stop drinking an over-priced, inconsistent product. I stopped drinking French wine when the French engaged in nuclear testing in Muroroa Atoll some years back. The high and mighty attitude of the French is a bit rich, bearing in mind the long-lasting legacy of French imperialism over the past couple of centuries.

Question:
Given Europe's obvious desire to emulate Japan and become a no-growth region, would it be in Ireland's long-term economic interest to leave EMU or even the EU? Chris Johns

Answer:
Jim: Chris, what a silly question! Of course Ireland should leave EMU, but as you and I know, there is no Irish politician with the vision or neck to even contemplate such a course of action. In Ireland's case, EMU was a victory for politics over economics and we have paid the price ever since. Ireland now finds itself tied into a German economy that is determined to emulate Japan. The upside for Ireland is of course that interest rates will remain exceptionally low into the long-term, but of course that is bad news for savers like yourself. Leaving the EU is a much bigger issue and one that we should not contemplate without the UK doing likewise. At least with Britain in the EU, there is some chance that the Anglo-Saxon model will prevail, but countries like Germany, France and the Netherlands will have to be dragged screaming in that direction. The current Iraqi conflict does of course pose huge questions for the future of bodies such as the EU and UN.

Cliff: As a mortgage holder, I'm very pleased we are in EMU.

Question:
Do you think the duration of the war will have any bearing on its economic impact, or is that being completely overestimated? Dominick O'Brien

Answer:
Cliff: Yes, I think it will an absolutely central factor. Quite simply, the longer the war, the greater the economic damage. In particular, a longer war could maintain oil prices at a relatively high level for long enough to do some further damage to an already-fragile world economy. Higher oil prices could further undermine consumer and business confidence, further delaying international recovery or even threatening recession. The financial markets are thus likely to be affected by the length of the war - signs of a short war will push prices higher, any danger of the war being drawn out will push them down.

Question:
Do you think the imposing war with Iraq will affect Ireland's international competitiveness? What do you think the general affect will be on Ireland's economy? Natasha Checkley

Answer:
Cliff: I think the general effect will be to delay economic recovery. It had appeared that the international economy might start to pick up this year- and Ireland with it. Now recovery has been delayed both internationally and at home. If oil prices stay high, meanwhile, the war will hit our competitiveness, and that of all oil importers, by pushing up costs to industry and consumers. This will add to an already-difficult environment for business, which is already facing competitive difficulties due to rising costs in a whole range of areas.

Question:
What about Shannon in all this? Tourism numbers are aleardy crashing. If Bertie stops US planes coming through, do you seriously think that'll do more damage to the tourist industry? Kevin Phelan, Cork

Answer:
Jim: We are doing enough damage to Irish tourism with or without the stance on Shannon. Prices are rising, standards are slipping and we treat our tourists very badly. We need to wise up in that regard very quickly, as Michael O'Leary will not be able to keep Irish tourism alive on his own.