The political uncertainty over Iraq is starting to take a heavy toll on financial markets. Share markets have had another poor week, while oil prices continue to edge upwards. Meanwhile, of most concern for the Irish economy, the euro continues to head upwards, breaching $1.08 yesterday as nervousness in the US continued to affect the US dollar.
The latest bout of market nerves is directly related to political events. Next week the UN arms inspectors will report their findings, while President Bush will give his State of the Nation address, sparking inevitable speculation of a quickening march to war. The old market bugbear - uncertainty - has investors moving funds into safe havens such as cash and gold and avoiding share markets.
These moves on the financial market have an impact on the wider world economy. Weak share prices and uncertainty over consumer demand are leading companies to hold off from new investment, a central factor behind current global weakness. Higher oil prices feed through to inflation. And currency movements have a significant impact on trade and investment flows. There is no prospect of any international recovery until the Iraqi situation is clarified and there is potential for significant damage to the world economy, depending on what happens.
As political events take their course in the weeks ahead, it is essential that economic policy does not add to the inevitable market nervousness and economic dislocation. If, for example, there was ever a time for the European Central Bank to be ready to reduce interest rates again, it could come in the weeks ahead. Any further downward revisions in growth expectations would surely justify a further cut.
It is also essential that the major economies show a genuine engagement with the ongoing Doha round of the World Trade talks. Any suggestions of a lurch back to protectionism would carry an uncomfortable echo of the events which led to the 1930s depression. Meanwhile, there is an urgent need for a pro-growth programme in Germany, the EU's biggest economy. Instead of discussing this, the EU bureaucracy is chiding Germany over its budget deficit.
Finally, as recognised in the theme of the current Davos summit, there is a need to "build trust." After a year of corporate scandals, the shattered confidence of investors needs reassurance through both a new climate of business transparency and openness - and more efficient regulation of markets by the responsible official bodies.