Danger of Recession in Europe

Article published on Oct. 21, 2002
community published
Article published on Oct. 21, 2002

This article has not been vetted by an editor at Paris HQ

The Anglo-American war could cause a new global recession. But the EU could, in one fell swoop, rescue peace, the economy and sustainable development.

Iraq is facing the threat of a second devastating war on its territory, which is in an extremely precarious situation. In the last few years the Iraqi economy has practically remained stagnant with wavering growth patterns, a pitiful quality of life and stable rates of inflation of two and nearly three figures. The embargo that is burdening Iraq is hitting practically all goods apart from drugs and food, and this seriously prejudices every attempt of economic revival; technology is lagging behind by a long way while replacements for machines are not to be found which means that every breakdown is permanent.

When you talk about the Iraqi economy the central argument and the fulcrum of every analysis is naturally oil: the Iraqi population in fact is barely surviving thanks (so to speak) to the UN's 'Oil for Food' programme launched in 1996. Iraq was permitted the export of a pre-determined quota of oil, which is placed on the market and the proceeds of which are destined for programs to aid the population with regard to food and medicines. The UN, that administrates the crude oil sale account, decides the destinations of the funds.

It is interesting to note that payments for Iraqi oil get put into effect only in euros, and it is equally important to note that Iraq is a full member of OPEC, the cartel that unites many of the major global producers of crude oil. The pre-ordained production of oil for Iraq wonders about at around 2.5 million barrels a day; if the embargo and the restrictions were lifted, it is considered that this supply could be increased by up to 30%. That would probably not influence global prices but could be an important currency for raising the Iraqi economy.

It is evident, in fact, that the 'Oil for Food' programme is amply insufficient to guarantee a decent standard of living for the population. One estimates that half a million children have died in the last 10 years, while on average every citizen has at their disposal 2000 calories a day, less that the minimum recommended amount of 2,400; moreover, the GDP per capita is about 2,700$, inferior to that of states such as Angola, Albania and Azerbaidjan. If, as it seems, it has only been the civil population who have paid the price of the embargo, given that the dictator who must have been the presumed objective is still very much active in his post, the instrument of embargo as a weapon against totalitarian regimes has again been unsuccessful (like, incidentally, on other occasions, including Cuba).

Certainly, an eventual war against Iraq will definitely not improve the situation; but it will worsen it notably at home and overseas.

The reason is simple, and it is connected to the observation that a strong and unexpected rise in the price of oil, in this time of Western economic stagnation, would have a devastating effect on the West. The European Commission considers that for every 10$ increase in the price of oil (per barrel), the economy would undergo, on average, a shock on growth of 0.5% of GDP; countries like Germany and Italy would automatically go into recession, and the subsequent chain effect would only be round the corner (if we imagine the impact on the stock markets of anti-inflation monetary policies, the recession could be even more serious).

The reason why a rise in the price of oil would be almost automatic comes from the fact that the Arab countries (notably Saudi Arabia), who have in many cases commercial and corporate agreements with Iraq, can easily bring the West to its knees by contracting the price of crude oil. Because this has an effect on GDP, the majority of economists agree that this would be long lasting, not imdemnifiable across a fiscal incentive due to increased war spending. In effect it is possible that this war will not be brief like 10 years ago, given that the Iraqis would not longer be facing their enemy openly in the dessert but through long guerrilla warfare, possibly in the big urban centres.

In any case, a cutting of 2.5 million barrels of daily production by Iraq could easily generate an increase of 10$ on the price of oil; during the war in 1990 the price doubled (from about 15$ to more than 30$) while when the 1999 supply was cut (4.3 million barrels) the price tripled (from 10$ to 30$).

In this context, the EU is preparing to ward off the blow, or at least take countermeasures. The Commission is in fact pushing forward the timetable for the implementation of integrated policy on energy at Community level, while it is also preparing a measure to increase energy reserves in such a way as to contrast the volatility of the markets.

One point, however, remains fundamental: common energy policy, characterised by strong foreign dependence, must be accompanied by a common foreign policy. Without this the measures taken at a European level can only be defensive with regard to reaction to immediate and current dangers.

An aggressive foreign policy must instead be stretched to anticipate the possible evolutions of the energy source markets, and in particular oil; it is in this matter really that Iraq plays a fundamental role.

The Iraqi country has at its disposal the largest oil reserves in the world after Saudi Arabia; one of the factors that characterises the high volatility of the oil market is the discordant voices about the durability of global reserves, and in this context Iraq and Russia represent indispensable sources for a continuous and stable supply.

If, as is the best hypothesis, America maintains frosty relations with Baghdad, the EU can be seen as the preferred partner of the Iraqis for oil supply, if they are free to decide where to sell it (today 45% is destined to the US who are themselves the 6th supplier, and 35% to the EU). The advantage would be having a durable source and major imports payable in euros and not dollars. Saddam Hussein's move to offer Iraqi oil to European society when he accepted the presence of UN inspectors was not casual.

The EU states would certainly have many good reasons for not joining a war on Iraq; this energy reason, in spite of being the most cynical, is none the less very important. On the other hand, it is certainly what is pushing America to a war with Saddam Hussein, that and a desire to accumulate a vast power in the political and economic chessboard of the Middle East. Thinking that the EU, following the American adventure, can participate in the feast is illusory; in exchange for the use of a few European exploits, the US would in fact obtain the domination of global energy policy.

For the EU the other way to lower the risks of a repercussion on their own economies from a petroliferous shock is investing in research and the practical use of renewable energy sources; this choice is surely far-sighted and is accompanied by the pleasant sensation of being able to open up the way for global sustainable development.

It is unfortunate that the use of renewable energy sources is directly proportional to the price of oil. The hope, therefore, is that policies to keep oil prices down do not prejudice this research; environmental crisis, unstable politics in the Middle east, and the volatility of the oil market would only send the problem back to a time when we were even further behind than today.