US says attack on Iraq would cause fleeting economic pain

The United States can bear the financial cost of whatever action against Iraq is needed, US Treasury Secretary Mr Paul O'Neill said yesterday, after a top White House economic adviser said that price tag could run as high as $200 billion (€206 billion).

"Importantly [President George W. Bush] hasn't said we're going to war.

"He said he's determined that there's going to be a regime change [in Iraq] and so we'll see how this unfolds," Mr O'Neill said after a speech in Portland.

"Whatever it is that's finally decided to be done, we will succeed and we can afford it," the Treasury chief, who is on a short swing through New England and New York to discuss the president's economic agenda, said during audience questions.

Bush economic aide Mr Lawrence Lindsey told the Wall Street Journal he estimated the United States may have to spend as much as an "upper bound" of 1 per cent to 2 per cent of its gross domestic product on a war with Iraq.

With US GDP running at about $10 trillion a year, that translates into a one-time cost of $100 billion to $200 billion, considerably higher than a preliminary private Pentagon estimate of about $50 billion, the Wall Street Journal reported.

White House officials showed surprise at Mr Lindsey's estimates and described his assessment as "premature".

While the financial costs sound high, economists, officials and even Federal Reserve chairman Mr Alan Greenspan have said that, unless the war is prolonged, the economy will suffer only fleeting pain from such a campaign.

The government is due to report its first full-year budget deficit since 1997 for the fiscal year ending this month and the costs of a war will likely receive close attention.

Mr Lindsey dismissed the economic consequences of even the substantial spending he estimated might be necessary, saying it would not have an appreciable effect on long-term interest rates or add much to the federal debt, the Wall Street Journal reported.

Some economists appeared to agree with Mr Lindsey's take on the overall economic impact.

Mr Roger Kubarych, senior economic adviser for the Americas at HypoVereins Bank, sees the impact from any confrontation as temporary, in part because he thinks Iraq will acquiesce to UN weapons inspections. If there is a war, he said, it could be won quickly.

He also said Mr Lindsey's numbers on the potential cost sounded high.

"I don't think it will be a big impact. The stock market will go down and oil prices will go up right at the beginning.

"This will scare people and they will become risk-averse," Mr Kubarych said.

"Once the war is clearly won, oil prices will drop like a stone," he added, noting there was already a war premium in oil prices. - (Reuters)