A second Gulf War could trigger recession in the euro zone, officials warned yesterday, as markets were braced for an imminent invasion of Iraq.
Central banks in Germany and Italy warned that the global economy was being harmed by the tension and the European Commission said a lasting spike in oil prices could heap more damage on the spluttering euro-zone economy.
"A stagnation or even a recession in the euro area cannot be excluded," the Commission said in its "worst-case" assessment of what a US-led attack on Iraq could mean for the euro zone.
It has also almost halved its estimates for euro-zone growth in 2003 and says hopes for a recovery next year depend on the uncertainty around Iraq being dispersed.
As a result, Brussels now expects only around 1 per cent growth this year, from 1.8 per cent forecast in November, and that is before the fallout of a war .
In its monthly report yesterday the Bundesbank said that tensions were taking a heavy toll, and the Italian central bank said a prolonged war would hit the industrial world hard.
"The rhythm of growth in the principal industrial economies could end up falling, even significantly," it said in a twice-yearly assessment of the economy.
Oil is the main channel through which the war will make itself felt in the pockets of the industrial world by cutting consumer spending power, although lower business and household confidence and international trade can make matters worse.
Mr Klaus Regling, head of the Commission's economics department, said that a swift war would have only relatively mild implications for growth. Outlining this benign scenario, Brussels reckoned oil prices would peak at $50 per barrel during a quick war, but be back to around $26 per barrel by the third quarter of 2003 and this would cost less than 0.1 percentage points in GDP growth.
"However, in the worst-case scenario, we assume a sharp deterioration of confidence, a higher risk premium and further declines in equity markets. A negative impact on world trade, global capital flows, investment and tourism also cannot be excluded," he said. - (Reuters)
