Ecofin considers effect of war on inflation, growth

The council of the European Union’s finance ministers (Ecofin), which met in Brussels on Monday and Tuesday, discussed four possible outcomes of the likely war on Iraq and how they will affect economic growth in the medium term. No official announcement of these discussions was made on Tuesday by Economy and Finance Minister Nikos Christodoulakis, who presides over Ecofin in the first half of the year. A confidential report presented to the ministers did not deal with the war in terms of strategy but, rather, with its impact in the prices of oil and the duration of that impact. In all cases, inflation and economic growth will be affected; inflation will rise and growth decrease. The most catastrophic of the outcomes also forecasts wild fluctuations in the exchange rates of the euro and the dollar. The first outcome, with the least repercussions on the economy, is based on a speedy war with no unpleasant consequences, such as anarchy in postwar Iraq, destroyed oil wells and mass population movements. In that case, oil prices will spike for a short time; their average during the first quarter of 2003 will be $43 per barrel, from $30 at the beginning of February. In that case, the EU’s gross domestic product will fall by 0.1 percent over the year and average inflation will rise by 0.1 to 0.2 percent. The second outcome forecasts a longer price spike, with oil prices shooting up to $57 per barrel. In that case, growth in Europe, forecast before the war to be an anemic 1.8 percent for 2003, will slow down to 1.4-1.5 percent. Inflation will be 0.5 percent higher than it would otherwise be, i.e. would average around 2.7-2.8 percent. The third outcome predicts longer-term consequences in the price of oil, which would average $35-$40 per barrel for «a few years,» according to the report. In this case, the negative effect on growth would be 0.2 to 0.4 percent for the next two or three years. Inflation would be 0.7 percent higher than forecast in 2003 and 0.4 percent and 0.2 percent, respectively, over the following two years. The fourth and worst outcome combines a long-term rise in oil prices with a collapse in consumer confidence, a drop in investments, stock markets and a dramatic drop in tourism. In this case, besides the monetary instability, the global economy would enter a recession. The EU would fare somewhat better, growing by 1.3 to 1.4 percent. Figures for the following years were not available.