MARCH 20, 2003
WAR IN IRAQ
High Stakes | The aftershocks of war in Iraq will reach every corner of the globe: The U.S. and world economies, big-power relations, and domestic politics
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Around the White House, George W. Bush is known as a soul of punctuality, a clockwork manager whose aides are met with a stern glare for being late to a meeting. So it should come as no surprise to anyone, least of all Saddam Hussein, that at roughly 9:30 p.m. on Mar. 19 -- just 90 minutes after his 48-hour "leave, or else" ultimatum expired, the President initiated a series of attacks that he termed the "opening stages of what will be a broad and concerted campaign" to topple "an outlaw regime." He ordered a pinpoint bomb and cruise-missile strike on Iraqi leadership sites in Baghdad. Anti-aircraft batteries ringing the Iraqi capital opened fire, and the skies briefly lit up with explosions. Then, all fell eerily silent.
Appearing on national TV less than an hour later, President Bush vowed "we will prevail." With full-scale bombing and a land invasion to follow, thus began the nation's second Iraq war in a little over a decade, a conflict that has sent tremors throughout the Middle East and put the entire world on edge.
In all, 300,000 U.S., British, and Australian troops, 1,000 warplanes, and five carrier battle groups were set to join the campaign to oust Saddam. That has led to predictions that it would be a matter of weeks, not months, before the battle would be over. But despite this awesome array of firepower, the world doesn't view this conflict with universal optimism.
MANY FUTURES IN DOUBT. Instead, there's gloom in many capitals over the wide ripples the intervention could cause. Because the U.S. and Britain had to mount a preemptive strike without U.N. support, relations with France, Germany, Russia, and other nations have soured, and a wave of anti-Americanism swept the world. That has put the future of the U.N., NATO, and other multilateral institutions in question and raised doubts about America's role as a superpower.
The stakes are equally large for the world economy. Months of debate over the war have paralyzed U.S. business. The result is a malaise that Federal Reserve Chairman Alan Greenspan terms a "soft spot" and that less sanguine economists believe has left the country vulnerable to a second dip into recession. With Japan and many of Europe's economic locomotives losing steam, a strong U.S. rebound is essential to kick-start global growth. But until it's clear that the President's Iraq intervention is a success and that it will not draw America into a costly quagmire, both the U.S. and the global economy are hostages.
Also at stake is Bush's political future. The Texan "hasn't done a compelling job of convincing people this is the right thing to do," says Thomas J. Corcoran Jr., CEO of FelCor Lodging Trust (FCH ) in Irving, Tex. Yet Bush is risking more than his own fate. If his strategy succeeds, it could pave the way for a GOP juggernaut in 2004. If it fails -- because the war drags on, terrorists strike, or the economy sinks -- Bush and his party could face the voters' wrath.
PERKIER BUCK. Still, for all the unknowns, a sense of relief ran through the markets as it became clear that the onset of war was at hand. For six successive sessions leading up to Bush's Mar. 19 "Get out of Dodge" deadline, the stock market advanced, as investors bet on a short war that would be followed by a return to growth. And while the minutes on the 48-hour deadline ticked off, the rally broadened, and the dollar perked up.
More important for Bush, his popularity shot up in tandem. His job approval rating hit 64% in a Mar. 17 CBS News poll, up from 54% a month earlier. And despite earlier misgivings about going to war without U.N. backing, popular support for removal of Saddam by force hit 71% in a Mar. 17 Washington Post/ABC News Poll, an all-time high. Bush's wartime standing could quickly soar even higher, at least initially. "Once the first shot is fired, the country unites strongly behind the President and military," observes Henry A. McKinnell Jr., CEO of Pfizer (PFE ).
The question, of course, is how long the rah-rah mood will last. Administration officials insist that when the smoke clears, pessimists who predict Vietnam-style entanglements will be proved wrong. But even Bush partisans concede that the President has bet the ranch on proving the skeptics wrong. Here's how the intervention could cast a long shadow over the U.S. and world economy, big-power diplomacy, and domestic politics:
• The Economy. The key to the U.S. economic outlook, say many executives, is a short, decisive war. That could provide relief from higher oil prices, which have risen from $25 per barrel last November to a peak of $38 earlier this month. War jitters drove consumer sentiment in the Conference Board's February survey to its lowest level in nearly a decade.
Triumph on the battlefield could pierce this gloom. Indeed, even before the troops moved into Iraq, the Standard & Poor's 500-stock index rose 8.5% on Mar. 12-19, while oil prices fell 27%, to $29.88. "We have the preconditions for a [postwar] surge in economic activity," says Steve Grossman, CEO of MassEnvelopePlus in Boston.
Most execs agree. "If we could get this war thing off our shoulders," says Stephen P. Wolfe, chief financial officer of Toro Co. in Bloomington, Minn., "we'd be poised for a breakout."
Yet, together with the underlying threat of new terrorist attacks, the price of oil is one of the big unknowns for the economy. If Saddam knocks out key oil fields, the resulting shock could trigger a slump. Saudi Arabia has promised to boost capacity to offset a temporary price jump. But because global stockpiles are short and instability is roiling the oil-producing states of Venezuela and Nigeria, that may not be enough. "The U.S. and world economy are extremely fragile," says Allen Sinai, chief global economist of Decision Economics Inc. consultants. "A prolonged war would likely trigger a full-fledged global recession."
Certainly, some industries will be hit harder than others, notably the airlines. Many are already canceling flights and bracing for the worst. Bankrupt UAL Corp. (UAL ), parent of United Airlines, could even face liquidation. "I would be surprised if no one else went into bankruptcy as a result of this war," says J. George Mikelsons, CEO of ATA Airlines (ATAH ), a carrier based in Indianapolis. Adds Thomas J. Pritzker, CEO of Hyatt: "If the first Gulf War is any indication, the hospitality industry will be damaged for some time."
And it isn't only travel-dependent executives who are fearful. Some techies have the blues, too. "As soon as [the shooting starts], customers may freeze," says Phillip Merrick, CEO of webMethods (WEBM ), a software company based in Northern Virginia.
While execs debate how strongly the economy may rebound, one thing seems likely: President Bush's economic plan may be an early casualty of the conflict. As worries have grown about a war and reconstruction tab that could exceed $100 billion, so has the feeling that the Administration's $1.45 trillion package of tax cuts should be sharply trimmed. It's now "a real uphill battle" for Bush's tax cuts, says a top GOP lobbyist.
Facing budget pressures, Bush may be forced to accept a scaled-back program that moves up scheduled 2004 and 2006 personal-rate cuts and provides modest investment incentives for business. Says Bruce L. Downey, CEO of drugmaker Barr Laboratories (BRL ) in Pomona, N.Y.: "I'm a big fan of eliminating double taxation. But realistically, a package that large will be deferred because of the cost of the war."
The ability of the world economy to weather Iraq-shock depends on how smartly America snaps back postwar. With Japan in a funk, Germany skirting recession, and much of the euro zone in the doldrums, U.S. growth of 3% to 3.5% is needed to spark a global recovery. But that may not be realistic in light of Bush's mounting war obligations.
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Copyright 2003, Bloomberg L.P.
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