War and the Economy: A Conversation with Maurice R. Greenberg

 Q:  War is a subject on everyone's mind these days--both the ongoing war on terrorism, as well as a potential war in Iraq.  What are your thoughts on this question? 

A:  My thinking is that the war on terrorism will continue.  The United States is gearing up for a long involvement.  The war on terrorism is not going to be something that we are going to "win" in the conventional sense.  Instead, we are combating a global threat, engaged in a war without borders.  This is something we have had to confront for the first time.  We are undertaking a major effort.  We have created an entire new department for homeland security.  We are likely to create a department that will coordinate all of the intelligence agencies.  We are going after the financing of terrorism.  We are dealing with a threat that is global in nature, not limited to any one particular area.  This war had a beginning in a conventional sense--manifested on 9/11--but it was really underway and ongoing before that; we simply were not aware of it.

 As to whether there will be a war against Iraq--I think that the likelihood was made even clearer by the President's State of the Union address.  The United States believes that it has sufficient evidence that Saddam Hussein has not confessed to all of the weapons of mass destruction in his possession.  He is in violation of the agreement he made with the United Nations, and he has not been cooperating with the inspectors.  I think that, in the end, the Europeans (minus perhaps the Germans) will be with us on this, and that other countries will join the coalition; I do not believe that it will be a unilateral U. S. action.  Although we would certainly be entitled to act unilaterally; we have every right to enforce UN Resolution 1441 and the other resolutions. 

Q:  What are some of the possible economic ramifications of military action?

 A:  The economy right now is affected by uncertainty.  Once there is a war, and hopefully, if it goes as expected, it will be over in not an unreasonable amount of time, the economy will respond very quickly.  Certainly, you cannot anticipate every possible action or outcome.  I am not privy to all of the intelligence information, but given the length of time we have been preparing, it seems that there is a high "comfort level" among the planners that this operation will be completed successfully.

 The question is the aftermath, what happens after we have won.  We are not going to make Iraq into a democracy overnight.  We will need to set up a regime capable of ensuring order and facilitating reconstruction.  I do believe, however, that Iraq should use its oil revenues to pay for the costs of the war and reconstruction; this should not be a burden for this country.  If Iraq had disarmed as it was obligated to, there would be no need for war.

 I am not convinced that oil prices will remain high, especially if Venezuela gets back on track.  I don't think that there will be any significant interruption in oil supply.  Saddam Hussein will do in Iraq what he did in Kuwait.  I was with Robert Mossbacher [Secretary of Commerce in the Bush '41 Administration] in Kuwait in 1991, when Hussein had set the oil wells afire.  Those fires were extinguished quickly.  We can cope with any potential sabotage of the Iraqi oil fields; we have the technology and we have learned valuable lessons from the Kuwaiti experience. 

Q:  Much has been made lately of the Euro's new strength.  Some argue that the possibility of war with Iraq and broader concerns about U.S. foreign policy have contributed to uncertainty about the dollar and helped the Euro.  What do you make of this? 

A:  I don't think that this is the result of any one single issue.  The looming war with Iraq has had a negative effect on the U. S. economy.  Added to that has been the impact of the corporate governance scandals.  This has led to an outflow of capital from the U. S. market to Europe, because investors sense better opportunities in European fixed income securities.  In addition, in the eyes of many international investors the dollar has been somewhat overvalued, and this has worked to keep new funds from coming in.  However, we must keep in mind that, objectively, the U. S. economy is still stronger than Europe's, and infinitely stronger than the Japanese economy.  The Euro has appreciated not because Europe's economy is doing better than that of the United States, but because of negative perceptions about the U. S. economy.  Once the war with Iraq is over, we will see an upturn in the economy, a psychological lift.  I believe that we will see a much-improved U. S. economy in the second half of 2003. 

Q:  Since 9/11, has there been a noticeable impact on business and global commerce due to terrorism? 

A:  Immediately after 9/11, there was a noticeable slowdown in both business and tourist travel, more so in the United States and Western Europe, less so in Asia.  Much of that has now returned to more normal levels; indeed, it is the weak state of the economy, not fear of terrorism, that has really hurt the travel industry.  Companies today are cutting back on expenses and so businessmen are traveling less, using alternate means such as video-conferencing.  In terms of business travel, we are seeing companies reduce expenses considerably, only authorizing travel that is absolutely necessary.  In terms of tourism, we are seeing reductions due to the weak stock market, so that people do not feel as wealthy as they once did and as a result are cutting back on personal travel. 

After 9/11, a number of major companies, notably here in New York, considered dispersing their employees rather than having them centralized in one location, but this has not been a major trend.  Of course, a number of new opportunities developed.  American International Group, for example, was one of the first to offer terror insurance.  We had to fight for a year to get the government program in place [the U. S. Terrorism Risk Insurance Act, or TRIA]; it was held up by the Democrats in the Senate, acting at the behest of trial lawyers who wanted to bring suits against companies for punitive damages in the event of a terrorist act for failing to provide their employees with a safe place to work!  With this legislation now in place, this should spur construction. 

There are, of course, a number of lingering effects.  Companies are paying additional costs for security; the cost of airline travel has gone up to pay for added airport security.  We have to deal with the costs brought on by delays in admitting containers as the technology to screen them is put in place, thus slowing goods down in transit.  At the same time, however, new industries are being born to provide capabilities in meeting these new threats.  Yes, there is a lag, but new firms are meeting the challenge to apply innovative ideas to overcome these new infirmities.

 Q: What do you think could happen if there were another successful terrorist strike, or if the current "Orange Alert" is followed up by further warnings? 

A:  Certainly, anything like another terrorist attack will have a tremendous negative effect.  Even raising the alert status to "Orange" heightens tension.  It creates pressure on people not to travel or even to gather in public places, and this in turn has negative ramifications for tourism and other businesses (entertainment, restaurants, and so on).

 Q:  May I ask about two specific industries--airlines and insurance--and how the war on terrorism and a potential war with Iraq might affect them?  For example, are we seeing increased shipping costs?

 A: Well, in preparation for a potential war with Iraq, commercial airliners are already being diverted to take up military transport roles, as occurred in the first Gulf War.  The airlines have also faced increased costs related to security, as I noted above. However, the problems we have witnessed in the airline industry predate 9/11 and have been ongoing for the last several years.  9/11 was, in a sense, a coup d'etat, a sudden blow, against the airlines, but the fundamental problem facing the industry has remained unchanged: how to bring costs in line with revenues. 

In the shadow of a looming war with Iraq, we have seen increases in the costs associated with marine transport and freight to the region as a result.  Some of the increased costs associated with the greater risk have been already factored in, but not all, so we can expect further increases in the event of war. 

Q:  Could you comment on the potential impacts arising from the crisis on the Korean peninsula?

 A:  I have just taken over the chairmanship of the U.S.-Korean Business Council, so this is a topic of especial importance.  South Korea is a very important trading partner for the United States; it is also a security partner of the United States.  As you know, we have thousands of troops stationed there.  If North Korea harbors weapons of mass destruction, it would change the entire balance in the region.  No one wants to see a nuclearized Korean peninsula.  It would force Japan to rethink its entire security strategy.  China, Russia and most obviously South Korea do not want to see a nuclear-armed North Korea that also possesses ICBMs.  It makes the region a tinderbox.

 We are going to have tread thoughtfully to bring about a resolution to this problem.  There is a very real problem; what is the point of trying to reach a new agreement with North Korea if they have already violated the previous one?  Nonetheless, I think that we will eventually need direct talks with the north.  Kim Il-jong appears to want economic aid and firm guarantees that the United States is not going to start a war with North Korea.  We certainly don't want war; the first one was bad enough.  I was there; I can vouch for that.  I am confident that in time we can reach a solution.  We do need to be thoughtful, careful in our choice of words to describe the situation.  We need to understand the culture and the sensitivities of the Koreans.  This goes a long way to creating conditions for a resolution of the problem.  After all, the entire region wants this problem solved; the United States is not alone in this. 

Q:  Korea is one area where it appears that China and the United States can work together.  Could you comment further on the future of the Sino-American relationship?

 A:  China has been very supportive of the United States in the war on terrorism.  They have been very cooperative on North Korea.  We are seeing the transition to a new regime, a process that will be completed in March, although I do believe that Jiang Zemin will continue to be the supreme power.  The trade relationship is vitally important, both to the United States and to China.  We can have a constructive relationship with Beijing.  We won't agree on everything.  China will not be a Jeffersonian democracy, even though political change is occurring.  Neither side wants to be the other's enemy.  China is going to be the leading power in Asia by virtue of its population and territorial position--I don't believe that the Chinese are seeking to control any new territory.  Certainly, Taiwan remains a flashpoint, but you have to look at the amount of Taiwanese investment in China, and the fact that 500,000 Taiwanese now live and work in China.  We have made our position clear: there is one China, but we do not support the use of force to resolve the issue.  Time, I think, will take care of that problem.

 Q:  In his State of the Union address, the President said nothing about free trade or the U.S. relationship to Latin America.  Does this signal any change in attitude on the part of the administration?

 A:  I was disappointed that free trade was not mentioned in the State of the Union, but the president remains committed to promoting free trade throughout the Western Hemisphere.  There have been some setbacks.  Argentina imploded.  In Brazil, Lula has to convince the world he is not going to jeopardize foreign investment or return to policies that promote an inflationary spiral that would make it unwise to invest in Brazil.  We have in Venezuela a leader with whom it is difficult to deal.  I think all of this makes it difficult to go ahead with creating a broad Free Trade Area for the entire region.  Thus, we have scaled back; we are trying to promote free trade agreements with Chile, with Central America and the Caribbean.  It is a good thing that the president received fast-track authority from Congress, to be able to negotiate free trade agreements without having to go back to Congress. 

I would like to see more attention paid to Latin America.  I am troubled by the trend to move to governments that are less democratic; there is also a tendency now to move leftward.  Latin America is and should be very important to the United States. 

Q:  Perhaps we could close with a short overview of the transatlantic relationship. 

A:  We need to recognize that Germany is a social democracy, not a market economy, and France is not far behind.  We have always had tensions with France on questions of trade.  We are not going to agree with the Europeans on everything.  We will act on our national interests, and the Europeans will do the same.  We have seen this in the World Trade Organization, where the Europeans have sought to undermine us, because it was in their national interests to do so. 

I do not think that Iraq will seriously affect our relations with Europe.  At the end of the day, I believe that even the French will sign on, although I don't really know about Germany.  NATO remains very important, and we should not let the alliance deteriorate.  We do need to work on our relationship with the Europeans, perhaps a bit more conscientiously than we have in the past.  In the final analysis, there is no reason we shouldn't have a trans-Atlantic relationship that is civil.

 Maurice R. Greenberg is chairman and CEO of American International Group, Inc., and the chairman of The Nixon Center.