While most attention is understandably focused on the military and humanitarian aspects of the war in Iraq, it is clear that it will also have significant economic implications. The financial markets, having soared last week in the hope of a quick victory for the US-led forces, fell back sharply on Monday and are likely to continue to trade nervously until the situation in Iraq becomes clearer.
The longer the war continues, the greater the risk of damage to the world economy.
The war in Iraq has contributed to what the Central Bank governor, Mr John Hurley, yesterday described as an exceptional period of uncertainty for the world economy. There had been hopes that the US would lead the world economy to recovery during this year. However, the hangover from the boom years - excessive corporate and personal debt levels and a rising federal budget deficit - continue to cloud US economic prospects. Now the war has literally put major business investment projects on hold and, if survey evidence is to be believed, unsettled consumers.
Against this confused background, investors have been struggling to decide on an appropriate level for the price of shares and other assets and commodities. Volatility has resulted, as hopes of a quick war led to predictions of an early economic recovery, and then the setbacks to the US-led forces brought renewed caution. The news from the Gulf will be the key factor driving markets in the short term, although the success of the US-led forces in securing many oilfields lessens the risk of a widespread destruction of these assets, which had been one key fear.
It is important to realise that the course of the war is not the only factor unsettling investors and that an end to conflict does not therefore guarantee rising share prices. First, the Iraqi conflict has also thrown up other issues; Mr Bush's announcement of a $75 billion bill for the conflict has refocused attention on the federal budget deficit, while the impact of the diplomatic fall-out on economic relations remains to be seen. And second, there are the existing uncertainties surrounding the prospects for the US and the very poor outlook for the euro zone and Japanese economies.
There is a limited amount that economic policy-makers can do, but they must do what they can. Further reductions in interest rates in the US and particularly in Europe may be required. While there are no immediate risks to the oil market, the developed countries must stand ready to release some of their strategic reserves, if required. And the inappropriate restrictions of the EU Stability and Growth Pact must be removed. It makes no sense for a German economy at risk of deflation suffering a further blow from cuts in government spending. Finally, it is essential that the diplomatic fall-out over Iraq does not spread to economic relations. Any drawing back from the move to free trade under the World Trade Organisation would deal a hefty blow to confidence and growth prospects in the long term.