The next month will be the decisive period for an American war against Iraq. According to my Washington sources, the build-up of American forces will reach completion by the second half of February. Unless there is substantial evidence of Iraq’s disarmament in accordance with the United Nations resolutions, the United States will enforce those resolutions by military action.
On 18th February, we are holding our Annual Fleet Street Letter Dinner in London. For full details on how to join us, please see page eight. I shall be speaking and will take the opportunity to review the political situation, which may then be only a few days from war. The whole of our investment outlook will be affected by whether this war occurs, and by its outcome. If Saddam Hussein is removed from power, either by a deal with his Arab neighbours, by assassination (which has been a common event in Iraqi and Mesopotamian history) or by the Americans, that will be good news for share prices. If there is no war or a drawn-out campaign, markets are likely to drift lower, though oil and gold may go higher. If Saddam Hussein is still in power in three months’ time, it will mean a defeat for the United States, with serious consequences for market confidence.
The Franco-German alliance is growing more cohesive
Already, the imminence of war has had a very important effect on the Western alliance. NATO was held together from its formation down to the break-up of the Soviet Union by fear of the Soviet superpower. It has held together more precariously since 1990, by practical agreement on successive international issues, and by the predominance of US defence technology and power. There were strains between the US and Europe during the break-up of Yugoslavia, but these strains did not amount to a breach, despite clumsy policy formation on both sides. Now that unity has been broken.
Germany and France are in agreement in opposing American action against Iraq, with Chancellor Schröder using Iraq as an issue in the German election campaign. Germany is now a temporary member of the UN Security Council and France is a permanent member. Both countries have coordinated their policy, which is one of hostility to American action. They believe that an attack on Saddam Hussein would be contrary to international law, despite his alleged failure to comply with a succession of UN resolutions.
This dissent is a crisis for NATO, which is still the main organisation for European defence. The views of France and Germany are unlikely to deter the Americans, but do threaten the whole structure of international relations. The rift obviously threatens the United Nations, which has relied on the defence power of the United States to give the only effective backing to its resolutions. When, as in Israel, the US has been unwilling to act, the UN has been important. The future of NATO is also under threat. The decision by Lord Robertson, the well-esteemed Secretary General of NATO, not to serve for a further year when his term expires, is not a good sign of NATO’s confidence.
Undoubtedly, this disagreement over Iraq threatens the whole future relationship between Europe and the US. In the two World Wars of the twentieth century, the United States saved Europe from German rule, making it less popular in Germany than in Britain. After the Second World War, the US saved Europe from Soviet rule, so making it less popular in Russia than in Britain. Now there is a danger that Europe will be developed as a rival rather than an ally to the US. There is a strong French nationalist tradition, hostile to the US and to Britain. President de Gaulle refused to allow Britain membership of the old Common Market in the early 1960s. President Chirac is a Gaullist. The US already regards Europe as an unreliable ally, and in the US isolationism is not dead.
International co-operation is needed for a successful world economy
From the economic and investment point of view, this potential division between Europe and the United States threatens the international structure of trade and currencies. American post-war policy has been globalist, creating the institutions of the World Trade Organisation, the International Monetary Fund and the World Bank. Antiglobalist protestors hate these institutions. But they have managed to preserve a surprisingly high degree of world financial stability in the last half-century, despite the breakdown of the Bretton Woods exchange system in the early 1970s, which was followed by global inflation.
The effectiveness of this system depends on co-operation between the US, which remains the world’s premier economy, the European Union, Japan and China, which are the world’s largest savers. Japan has the most efficient export industries and China the lowest export costs of major powers. The global system also requires co-operation from the main Arab oil producers, which makes the confrontation with Iraq particularly significant.
This global economic system is based on the American economy and the dollar. The US is already running an external deficit, mainly financed from Asia, of 5% of gross domestic product. The dollar has been under pressure. A split between Europe and the US would be very dangerous for the whole global economic structure established since 1945. It would be almost impossible for the British Government, as we have close ties with both sides. This is a big, big crisis for the world.
Former editor of The Times, William Rees-Mogg sits as an independent peer in the House of Lords.
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