Expert View: Get ready for the war in Europe

"The market wants us to go to war, and the sooner the better." The words hung in the air, shocking the speaker as much as the assembled seminar of financiers. We all had explanations for the origins of the bear market but few could offer a clear way out. Few, that is, apart from this banker. To him, it was worse for the market to travel despondently than to arrive. The moral implications of this do not bear thinking about.

"The market wants us to go to war, and the sooner the better." The words hung in the air, shocking the speaker as much as the assembled seminar of financiers. We all had explanations for the origins of the bear market but few could offer a clear way out. Few, that is, apart from this banker. To him, it was worse for the market to travel despondently than to arrive. The moral implications of this do not bear thinking about.

It wasn't much fun being in Rome with Tariq Aziz. The Iraqi foreign minister's movements around the holy city reduced its ancient network of streets to gridlock. Every client I met talked of nothing else but him. There are times when investment bankers become fixated on minute details of likely events, and how they affect investment. At the time of Mrs Thatcher's removal, pundits knew everything there was to know about Tory backbench voter intentions, and even whether John Major was going to the dentist. We are living through just such a moment now, and no market strategist report is complete without graphs of Iraqi tank deployments and details of the political make-up of the Security Council.

If the more ruthless players in the City and Wall Street are starting to pray for war, they should consider the implications. These are not just the economic effects of any conflict, but other consequences. Arguments rage among economists as to whether war will have a depressing effect, as activities such as tourism spiral down; or whether the overall gearing-up for military expansion gives spending stimulation. One thing they all agree on is that the US budget deficit is heading skywards.

The effect on the stock market is what the seminar was all about.Looking from the bottom up, most individual stock prices have made the "usual movements". Oil stocks have headed up, hotels and airlines have fallen. The interesting exception to the rule has been the defence stocks, which seem strangely subdued.

What requires much deeper analysis, however, is the financial and economic consequences of the diplomatic spat between the US and "old Europe", and that between old Europe and "new Europe". Let's start with the currency. As someone who is essentially pro-euro, I have never felt so despondent. Given the open row between Messrs Blair and Chirac (indeed, comments in the French financial press hint that the President is working to remove our Prime Minister by encouraging a Labour Party revolt), will Mr Blair really have the will to drive our membership through? Will the Europeans listen to him?

If UK entry is now more difficult, what of the prospects for the euro itself? The dollar depression may prove temporary. A quick American victory, and a resurgence of US economic growth, could bring about rapid change. On the flip side, the euro's strength seems at odds with the diplomatic disunity, and with the weakening prospects for the euroland economy.

But there are other issues around trading patterns, and on individual stocks. The US is becoming increasingly belligerent on trade negotiations, and we may well see a repeat of the steel tariffs row. There is talk in the US of a consumer boycott of certain old European goods. There is some evidence of the US government taking revenge by cancelling contracts: a German defence company suffered just last week. The intra-European diplomatic conflict does not appear, as yet, to have spilled over here. But that can only be a matter of time.

Last week there was one moment of unity between Britain and France/Germany. Gordon Brown, under the cosh from the European Central Bank for his own ballooning budget deficit, found succour from this unlikely quarter. Now that really is depressing.