EoW May 2008

Transat lant ic Cable

Reviewing ❈ ❈ The Three Trillion Dollar War (“What’s the Tab?”, 16 th March), Mr Lozada noted that the co-authors address the economic realities of the Iraq war far more fully than did the Bush administration before the invasion. The deputy defence secretary at the time told Congress that Iraqi oil revenues would fully finance any postwar reconstruction, while an economic adviser to Mr Bush lost his job for suggesting that the conflict could cost $200 billion (a fraction of the funds appropriated to this point in 2008). Mr Stiglitz and Ms Bilmes write, “The tone of the entire administration was cavalier, as if the sums involved were minimal.”

The economy

Until recently, the Iraq war seemed to exert a strikingly small short-run impact on the US economy. No more

“There is no such thing as a free lunch, and there is no such thing as a free war. The Iraq adventure has seriously weakened the US economy, whose woes now go far beyond loose mortgage lending. You can’t spend $3 trillion – yes, $3 trillion – on a failed war abroad and not feel the pain at home.” Thus did Linda J Bilmes and Joseph E Stiglitz mark the approach of the fifth anniversary, on 19 th March, of the war in Iraq – the second-longest in US history (after Vietnam) and the second most costly (after WorldWar II). Asserting the impossibility of separating the war from the economy, Mr Stiglitz, the Columbia University economist and Nobel Prize winner, and Ms Bilmes, an expert in public finance, claim that the US will be paying the price of Iraq for decades to come. ( Washington Post , 9 th March) A review of the Stiglitz and Bilmes book The Three Trillion Dollar War: the True Cost of the Iraq Conflict in fact notes that the co-authors’ $3 trillion price tag reflects a choice to risk erring on the conservative side. The final tally in their “realistic-moderate” scenario reaches $5 trillion. Moreover their figures do not count the costs of the war to Iraqis and US allies, nor to the rest of the world. To make matters worse, the US economy is facing a recession. But The Three Trillion Dollar War observes that the country’s ability to implement an effective economic-stimulus package is hampered by expenditures of close to $200 billion on the wars in Iraq and Afghanistan this year alone, and by a “skyrocketing” national debt. Filling in the bleak picture, Mr Stiglitz and Ms Bilmes observe that the total loss from the economic downturn now facing the US (as measured by the disparity between the actual output of the economy and its potential output) is likely to be the greatest since the Great Depression of the 1920s and 1930s. The current total, itself well in excess of $1 trillion, is not included in their estimate of the cost of the war. Excerpts from The Three Trillion Dollar War have appeared in American and international publications, and the book is due to be translated into Dutch, French, German, Italian, Spanish, and Japanese. In his review in the Post , Carlos Lozada wrote that the White House – “to no one’s surprise” – has dismissed the book’s conclusions. Also true to form was its shift away from the topic into a fuzzier area. “People like Joe Stiglitz lack the courage to consider the cost of doing nothing and the cost of failure,” White House spokesman Tony Fratto told reporters. “What price does Joe Stiglitz put on attacks on the homeland that have already been prevented? Or doesn’t his slide rule work that way?”

The US dollar tumbles, and Europe feels the jolt

While the Iraq war and the US economy are inextricably intertwined, in this presidential election year the economy looms larger in the minds of voters; and their concern is exacerbated by the fall of the US dollar to record lows against other major currencies. On 14 th March, a day on which the euro traded for an all-time high of $1.5687, the dollar hit its lowest point against the Japanese yen in 12 years and fell below the Swiss franc for the first time ever. Considering the number and seriousness of the other threats to their serenity – big job losses, troubled mortgages, soaring fuel costs, a credit crisis, turmoil on Wall Street – Americans may perhaps be forgiven some self-centredness just now. But those who can spare a thought for their European counterparts might consider the broader implications of the steadily weakening US currency. European regional editor Jack Ewing of Business Week notes that, as the greenback nears lows last seen in 1995, it is forcing a radical rewrite of business plans all over Europe. While some companies do benefit from lower import costs, those that manufacture in the euro zone and sell in the US or Asia are finding themselves at a serious competitive disadvantage. (“The Power of the Falling Dollar,” 10 th March) The increase in the value of the euro (80% plus since October 2000) is making it difficult if not impossible for European goods to compete on price with products made in the US. Charles Edelstenne, chief executive of French aircraft maker Dassault Aviation and head of the French aerospace manufacturers association, told Business Week that the pain in his sector is the worst he has seen in nearly 40 years. Mr Ewing observed that the big disappointment for Europe is that it has worked so hard in the last decade to protect itself from just this kind of currency market oppression: “After the last dollar-induced crisis in the mid-1990s, many [European] companies set up operations in the US and Asia so that shifts in currency values would tend to balance each other out. They also protect against currency swings with sophisticated hedging techniques.” Moreover the euro itself, introduced in 1999, eliminated currency risk for trade among the 15 nations using it. Most European countries are still one another’s largest trading partners.

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EuroWire – May 2008