Is the Iraq crisis principally about removing a despot from power or is the underlying reality more to do with asserting US global hegemony? Stephen Timewell explores the issues and discusses their implications for banking and finance.

The 21st century is on the verge of losing its virginity. In a world already dominated militarily and financially by the US, the administration of President George W Bush seems intent on tearing apart the relative peace and stability of the Cold War and post-Cold War period by imposing its will against considerable opposition and taking a unilateral decision to go to war on Iraq. Like the fall of the Berlin Wall in 1989, the war on Iraq is another pivotal global political event. But, unlike the Wall, the war represents a radical shift in US foreign policy and potentially massive dangers.

As The Banker goes to press and the military campaign moves into action, the real reasons behind this avoidable adventure are still hazy and their intended consequences even more obscure. Nevertheless, some aspects are clear: the vociferous opposition, the lack of support in the United Nations and the obvious concerns about what happens after the initial fighting subsides.

Former US president Jimmy Carter spoke for many when he said recently: "Profound changes have been taking place in American foreign policy, reversing consistent bipartisan commitments that for more than two centuries have earned our nation greatness. These commitments have been predicated on basic religious principles, respect for international law and alliances that resulted in wise decisions and mutual restraint. Our apparent determination to launch a war against Iraq, without international support, is a violation of these premises."

Bush picks war over law

Critical of the Bush administration's approach, retired US general and former NATO commander Wesley Clark expressed his concerns: "They picked war over law. They picked a unilateralist approach over a multilateral approach. They picked conventional forces over special-operations forces. And they picked Saddam Hussein as a target over Osama bin Laden." And while General Clark was not concerned that the US military would find it difficult to crush the Iraqi army, he was worried by what comes after the overthrow of Saddam and the "unpredictability of consequences" in dealing with the potentially explosive mix of Shiites, Sunnis, Kurds, Arabs, Turks and Iranians in the immediate region.

Mr Bush appears to be oblivious to many of the dire consequences of the war. Professor Marvin Zonis of the University of Chicago says: "The vast array of risks – from Saddam using of weapons of mass destruction against US troops to torching his oil fields, to the supercharging of Muslim hatred of the US to the launching of new terrorist attacks, to internal strife in Iraq and conflict between the Turkish and even Iranian armed forces and the Kurds, to weakening of the trans-Atlantic alliance – seem to be utterly missing from the president's concerns."

Why is the president so blinkered? Professor Zonis, reflecting on Friedrich Nietzsche's line "the visionary lies to himself, the liar only to others", suggests: "The president is not a liar, but he is a visionary, as are many in his administration. The desire to remake the Middle East, to eliminate terrorism worldwide, and dictatorship and conflict in the region, are all visionary, idealistic, Wilsonian notions. In the service of that vision, however, the president appears to be lying to himself or to be in a state of denial. If that is too harsh, then at least President Bush certainly appears to have banished all doubt to reach a sense of rightness that brooks no uncertainty."

Obsession with regime change

Why have Mr Bush and key members of his administration, the so-called visionaries, been so obsessed by the idea of regime change in Iraq? Given that public opinion in the US and elsewhere has not been readily convinced by the threat posed by Saddam and has been opposed to unilateral action, why has the Bush team pushed so hard?

The answer appears to lie well beyond the stated aims of Iraqi disarmament and has its roots in the clique of Bush policy advisers who cut their political teeth in previous Republican administrations. Vice-president Dick Cheney, defence secretary Donald Rumsfeld, his deputy Paul Wolfowitz and chairman of the Defence Policy Board Richard Perle were all prominent in the Reagan and Bush senior administrations and used their years out of office in the Clinton years to hone their political vision. A key part of this right-wing vision was that the US, as the sole superpower, should tolerate no rivals and should use its military dominance to enforce this new world order. This singular view has become the driving force behind the Bush administration's thinking and can be seen in its willingness to adopt policies of pre-emptive military force, its disdain for the United Nations and the multilateral approach, and now its unilateral action against Iraq.

While recent months have been filled by talk of inspectors, UN resolutions and disarmament, this is seen by some as a smokescreen for the above clique's real motive: raw power. The Wolfowitz clique, which fashioned its ideas in the 1980s well before the 9/11 disaster, has been able to capitalise on the country's fears and overall shift to the right and move its conservative agenda into the mainstream.

For many, including officials in the Middle East, the real motive behind the Bush administration's continued focus on Iraq in the aftermath of the Afghanistan campaign is global hegemony. By taking and controlling Iraq, the clique believes, a clear message is sent to the region and to the world about the US's global supremacy, regardless of the costs in terms of human lives and damage to international law, international institutions and US reputation abroad.

"The US is not just interested in oil from Iraq, it is concerned to maintain political dominance over all the oil-producing countries of the region," says US commentator Peter Dale Scott. "Secretary of state Colin Powell gave a glimpse of US intentions when he told the Senate Foreign Relations Committee on February 6 that success in the Iraq war 'could fundamentally reshape that region in a powerful, positive way that will enhance US interests'. In conceding that it will be necessary to station US troops in occupied Iraq for the forseeable future, the US is serving notice to Iran and Saudi Arabia (both of which were once secure bases for US troops but are no longer so) that the US will reassert its presence as the dominant military power in the region."

Implications of US rule in Iraq

What will US rule in Iraq mean (assuming an eventual US military victory)? If hegemony is the prime aim then the US can use its Iraqi presence as leverage against those in Asia and elsewhere who get their oil supplies from the Gulf. Pressure on Asian buyers, especially China, gives the US a key advantage if viewed from a hegemony perspective. And if the long-term view is that the US economy is becoming increasingly uncompetitive, then a cynical, defensive strategy would support the invasion. A US foothold in the Gulf region could also put more pressure on Gulf states for much needed political change but this could also work against US interests if moderate elements are usurped.

A long-term physical presence in the Middle East creates a new front for the US that could also provide a platform for change in Arab-Israeli politics. The Wolfowitz clique, however, is unashamedly predisposed towards Israel and, while a greater US role could create a much-needed breakthrough, it is doubtful that the Palestinians will be well served.

In short, the 'hegemony play' argument provides the US administration with significant new opportunities if raw power is the key and the US is willing, as it seems to be, to sacrifice relations with Europe, NATO and multilateral institutions.

Many, however, believe that there are other issues besides hegemony and see the reasons for the war in terms of oil, petrodollars and the OPEC euro question. While defence secretary Donald Rumsfeld and UK prime minister Tony Blair have stressed repeatedly that the war has nothing to do with oil, it is difficult to discount its importance.

Mr Scott says: "Iraq's proven oil reserves are 113 billion barrels, the second largest in the world after Saudi Arabia and 11% of the world's total. The total reserves could be 200 million barrels or more, all of it relatively easy and cheap to extract. Thus, increasing Iraqi oil production will diminish the market pressure on oil-importing countries like the US. It will also weaken the power of OPEC to influence oil markets by decisions to restrict output. Indeed, were Iraqi oil production to expand to near its capacity, the quotas established by OPEC would cease to be honoured in today's markets."

US researcher William Clark takes a similar line: "President Bush intends to topple Saddam in a pre-emptive attempt to initiate massive Iraqi oil production far in excess of OPEC quotas, to reduce global oil prices and thereby dismantle OPEC's price controls. The end-goal of the neo-conservatives [Wolfowitz clique] is incredibly bold yet simple in purpose: to use the 'war on terror' as the premise to finally dissolve OPEC's decision-making process, thus ultimately preventing the cartel's inevitable switch to pricing oil in euros."

The euro as an alternative oil transaction currency is another issue that is little discussed but it is difficult to see why and how the world will move away quickly from the dollar. Nevertheless, the euro has gained considerable strength against the dollar this year in the build-up to the war and this trend, traders suggest, will continue. One analyst suggests: "The Federal Reserve's worst nightmare is that OPEC will switch its international transactions from a dollar standard to a euro standard." Whether this would happen, even in the medium term, is debatable but by installing a puppet government in Baghdad, the US is clearly ensuring that OPEC momentum to the euro is vetoed not only for Iraq (which now uses the euro for oil sales) but also for Iran, which has been considering a switch to the euro.

Bankers beware. The invasion of Iraq is not just a military exercise. If the US's desire to use its muscle overtly, as it seems to be doing, is also reflected in various financial and economic arenas then a new world economic order may be at hand. Whatever is not in the US's financial interest, such as Basel II for example, may be scuppered. An aggressive, isolationist US is not good for markets.

The aftermath of war

What happens after the war has been little discussed and few people have thought through the multiple repercussions and scenarios that could result. What seems clear is that the Bush administration expects to turn Iraq into a US protectorate, stamping its political hegemony on the region and restoring the economic hegemony of the dollar.

Whether President Bush is in denial is unclear but he seems to be oblivious of the damage that could be wrought. The policy of taking the battle to the enemy and stating "the only path to safety is the path of action" emphasises the Wolfowitz clique's dream of US unilateral power. The risk of political and economic retribution, however, appears not to be considered.

Perhaps the US should remember Britain's humiliating retreat from Suez in 1956, when the US forced retreat on it as a condition for propping up the failing British pound. The US is embarking on a dangerous adventure in Iraq with dangerous consequences. The idea that this unilateral use of military force will not provoke further reaction beggars belief. The Bush administration, as well as the rest of the world, faces a difficult road ahead.

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