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Worry and unease replaced the once-high optimism in Western financial markets in the past week as the advance of the US-led coalition forces was checked by fierce resistance from the Iraqis in the battlefield.
Should the ongoing war be prolonged, a worldwide economic recession might be unavoidable, said Horst Koehler, Managing Director and Chairman of the Executive Board of the International Monetary Fund (IMF).
The Iraq issue has remained one of the most important obstacles to the world economic recovery since the second half of last year.
After the Bush administration expressed its will to disarm Iraq by force last year, Western investors and consumers started to lose their confidence, fearing a possible interruption of oil supply from the Middle East and new round of terrorist attacks. As a result, the stock markets and the exchange rate of the US dollar began to fall and the oil prices shot up quickly.
The propaganda of the US media left Western investors with the illusion at the beginning that the Iraq war would be a brief one.
The temporary confidence in financial markets generated a sharp fall of the oil prices, bullish world stock markets and a higher US dollar, with the Dow-Jones industrial average climbing 997 points in the eight consecutive days to March 21.
The confidence, however, has completely gone as the coalition forces met stronger and stronger resistance in Iraq. In the past week, Western stock markets and the exchange rate of the dollar fell sharply and crude oil prices are rising again.
In the past five trading days, the Dow-Jones industrial average fell for four days with a total decline of 4.4 percent and the exchange rate of the US dollar also began to drop. May crude futures in the New York market soared to more than 30 dollars a barrel.
Some analysts said the Iraq war may have impacts stronger than expected to the world economy.
The world economy -- the United States, Japan and Germany in particular -- recovered slowly last year. The US economy, the world's number one economy, advanced at a weak 1.4 percent annual rate in the fourth quarter of 2002 and the German economy, the so-called engine economy in the euro zone, remained stagnant. Although Japan's growth rate reached an unexpected 2 percent in the same period, yet the Bank of Japan said the country's growth rate was still fluctuating.
Since the beginning of this year, the US economy has suffered several blows. Consumer spending, which takes up two thirds of the US economy, saw a zero increase in the first two months and consumer confidence dropped for four consecutive months and reached the lowest point in the past 10 years.
Some US organizations said the US economy would drop by 1.9 percent and plunge into a serious recession if the Iraq war turns to be protracted.
Serious structural imbalance in Western economies has crippled the ability of the Western world to cope with the crisis.
The United States is still facing a number of problems resulting from the economic bubbles, including huge amount of debts, severe overcapacity and scarce bank savings. The Japanese economy is restricted by deflation and tremendous bad debts in its banking sector. The euro zone economy is contained by its stiff labor force market and tight fiscal and monetary policies.
Furthermore, the Western world has little leeway in stimulating the economic growth through readjusting its fiscal and monetary policies.
In terms of the monetary policy, the official interest rate of the United States stands at 1.25 percent, leaving virtually no room for further cuts, while Japan has a zero interest rate and the European Central Bank is reluctant to lower its interest rate for it wants a strong euro.
As for the fiscal policy, it is difficult for Japan and the euro zone to expand public spending, for the former has huge public debts, and the latter faces strict restrictions on fiscal deficits.
Although US President George W. Bush put forward an aggressive tax-cut plan to stimulate the economy early this year, the US Senate recently pared it down to a half. Even if the plan is finally approved by the US congress, it wouldn't be significant.
The US-led war on Iraq will also bring serious consequences to many developing countries.
As the majority of developing countries are oil importers, if high oil prices hover for a long time, production cost in these countries would soar up, inflation would escalate and economic growth slow down.
If the war leads to economic recession among developed countries, the exports of developing countries would be seriously hit.
Moreover, the dispute among the United States, France and Germany on the military action against Iraq may prick up their already-existing trade disputes, especially in agriculture, which would hinder the multilateral negotiations of the World Trade Organization from which the developing countries benefit. This would also result in more losses to the world economy in the long run.
(Xinhua News Agency March 31, 2003)
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