German Economy Could Lose Out in Iraq Crisis

While wars and large-scale military actions often boost sagging economies, German economists and business analysts have warned over the past few days that a U.S. attack on Iraq would worsen the already weak German and European economies.

Already the fear of war has pushed oil prices to the highest level in more than a year. Indeed, the worldwide economic decline that started two years ago was ushered in by climbing oil prices, said German Finance Minister Hans Eichel at a meeting of European Union leaders in Copenhagen over the weekend.

On Monday, the price of oil was at $29. During the Gulf War in 1990, the oil price soared to more than $40. The next meeting of the Organization of Oil Producing Countries (OPEC) is on September 19 in Osaka, Japan.

In addition to concern about oil shortages leading to higher prices, German experts also warned that the American conflict with Iraq is also negatively affecting the public mood in Germany.

If Germany were to enter the conflict, it’s reasonable to assume that taxes might need to be raised to finance the action, Holger Wenzel, head of the German retail association HDE told Die Welt.

Fear about decline in retail sales

With a sales tax increase of one percent, independent retailers in German would lose 9 billion euro, Wenzel said. Under this scenario, grocers and those selling necessities would see sales remain stable, but those selling products like digital cameras would be hit hard.

Another consequence may be a stronger dollar, which has proven to be the currency of choice during times of crisis.

Thomas Hueck of HypoVereinsbank, told DW-WORLD that he expects further economic declines this year.

“The third quarter could be OK, but we can’t reckon with big improvements,” he said. Besides sinking public confidence, which dampers consumer spending, Hueck said German companies are holding off on making big investments.

Stock market slump isn't helping matters

In the past, companies have financed their growth with earnings from the stock market – something that’s not possible as markets sink.

Across the Atlantic, military conflicts have traditionally provided an economic boost as spending flows to the defense industry. As a consequence of World War II, Germany has little in the way of a defense industry and thus cannot count on this sort of ecnomic fallout from a possible war.

Indeed, Deutsche Bank economist Norbert Walter told the German news agency DPA: “The peace dividends that we’ve been enjoying for the past decade since the end of the Cold War are now a thing of the past.”

On the political front, the issue has taken center stage in the past days since Chancellor Gerhard Schroder came out opposing German involvement in a possible U.S. attack on Iraq.

Opposition candidate Edmund Stoiber stressed the need for continued good relations with the U.S. in the second and final television debate on Sunday night. And with elections just two weeks away, it’s clear the economy will remain an important issue for voters.

The German Bundesbank expects economic growth of just 0.5 percent in 2002 and approximately 2 percent in 2003, according to a report in Der Spiegel.