Iraq Rift Could Threaten US-EU, Global Economy

WASHINGTON - The rift over Iraq between the United States and key European allies threatens the trans-Atlantic economic relationship that is the main engine of the global economy, analysts say.

A deep rift could do permanent damage to the economic relationship that accounts for some US$2.5 trillion (S$4.3 trillion) annually in trade and investment, according to a study by Johns Hopkins University's School of Advanced International Studies.

Joseph Quinlan, a former Morgan Stanley economist who authored the study, said the consumer backlash in each market could degenerate and hurt the economic relationship.

"Some of this stuff is amusing about 'freedom' fries, but the stakes are very high," said Mr Quinlan.

He said the US and Europe are each other's most important partners for trade and investment, and also are the leaders in the drive for a freer global trading system.

"Trade relations are like a bicycle, you have to keep it moving or it's going to fall over," he said.

"The US and the Europeans have to collaborate and lead the way, or else there's really no other real incentive for other countries to put things on the table" for liberalised global trading.

Jay Bryson, an economist at Wachovia Securities, agreed that the US-European relationship is a critical one that may be damaged even after the Iraq crisis is settled.

"Although the Iraqi crisis will come to an end sooner or later, the tension in US-European relations that the crisis has engendered may linger for some time," Mr Bryson said.

He said that US-European friction could hurt efforts for freer global trading rules. Additionally, a drying up of European capital for the US economy would be damaging.

"Europe is the predominant suppler of foreign capital to the US economy," he said. "A significant decline in European capital flows to the United States could cause long-term interest rates to rise and the dollar to weaken."

Europe buys some 24 percent of US exports, Mr Bryson said, with a value in 2001 of US$174 billion, and that could fall if trade frictions rise.