Kosovo Costs Could Run Much Higher Than Estimates

The U.S. is paying for a big chunk of the Allied bill. If the conflict escalates, this could impact future budget surpluses.
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NATO

ground invasion of Kosovo, followed by a comprehensive clean-up in the Balkans, would put significant strain on the public finances of the alliance's member countries.

Even a relatively swift land campaign followed by a post-war Balkan reconstruction plan could cost NATO countries nearly $80 billion, a sum that well exceeds allied government estimates, according to a

TSC

calculation using figures provided by defense economists and Balkans specialists.

If, as is likely, the U.S. agreed to pay 60% of an $80 billion overall bill, the Kosovo conflict could take significant chunks out of the budget surpluses projected for the next two fiscal years. The U.S. is expecting a $126 billion surplus in the 1999 fiscal year and $137 billion in 2000.

TSC's

$80 billion figure is for a relatively short land campaign. Say, however, a ground war lasted over six months, the total cost could be easily be two or three times that sum. Such spending could rock the Treasury market.

Says Steve Van Order, strategist at

Calvert Asset Management

: "If the war really escalates, it could start to have a material impact on people's expectations of the budget surplus, which could have a drag on Treasury prices."

The cost of financing a drawn-out ground war could also seriously erode fiscal accounts in NATO's 16 European members, some of whose fiscal deficits are close to the limit imposed by the

Maastricht

treaty. The French and Italian deficits are closest to the 3% of GDP fiscal deficit limit.

Here's how we arrived at our numbers.

A four-month air campaign followed by a six-week ground war to seize Kosovo from the Yugoslav army could total almost $50 billion. The cost of the 37-day-old air campaign has been roughly split 60:40 between the U.S. and other NATO members, says Digby Waller, defense economist at the

International Institute for Strategic Studies

in London.

Waller says that NATO's air campaign is costing $3.3 billion a month, a figure that is considerably higher than the $2.1 billion estimate based on figures from allied governments. His analysis, based on the Gulf War and the Falklands conflict, arrives at a higher total mainly because he is factoring in wear and tear on allied materiel. Four months of air bombardment, designed to prepare Kosovo for a ground invasion at the end of July, would therefore cost $13.2 billion, according to Waller.

A ground force would probably comprise 150,000 to 200,000 troops. This is roughly one-third the size of the Gulf War force, which cost some $100 billion and fought for six weeks. Thus, the Kosovo invasion force, assuming it were also in combat for six weeks, could end up carrying a $33 billion price tag, Waller estimates.

The $50 billion figure is reached by adding this $33 billion to the $13.2 billion of prior air costs and then adding in humanitarian aid of $3 billion. The aid figure is roughly two thirds more than the amount currently budgeted by NATO governments to take account of the greater upheaval associated with a ground war.

Official estimates of the cost of a ground invasion are quite a bit lower. Using

Congressional Budget Office

estimates, an air campaign combined with a 200,000-strong land force would set the US back $3.2 billion a month. Assuming such a force begins to be dispatched in early May, takes three months to assemble and achieves victory in mid-September, the total cost would be $14.4 billion. Add on the 40% extra ($9.6 billion) for the rest of NATO and the total force comes to a much lower $24 billion.

Of course, the allies are hoping that the air campaign will be enough to force Belgrade to surrender. It'd certainly be a lot cheaper. If it takes five months to bomb Belgrade into submission, the air war, the 30,000 troops currently stationed at Kosovo's borders and the already budgeted humanitarian aid would come to a much lower $18 billion.

Post-war reconstruction and peace-keeping costs for the Balkan region could add on an extra $20 billion. European leaders have talked in grand terms of setting up a so-called Balkans Marshall Plan if Yugoslavia is defeated. The Balkan countries affected by the fighting need $2 billion to rebuild, the

World Bank

estimates.

Reconstructing and patrolling Kosovo could lead to an outlay of $5 billion over four years, the amount Bosnia got after the 1995

Dayton

peace settlement. True, Kosovo is smaller, but damage will probably be more widespread. Also, it may be necessary to be generous with aid to a future ethnic Albanian-led government of an autonomous Kosovo to persuade it to "temporize" on independence, remarks Dan Goure, deputy director of political and military studies at the

Center for Strategic and International Studies

.

Post-war reconstruction costs could soar if Serbia were included in the plan. Of course, this would not happen if Milosevic is still in power, but defeat in Kosovo could spell his demise.

If Serbia is included, the total size of the post-war plan for the Balkans may have to go as high as $20 billion, says Michael O'Hanlon, foreign policy scholar at the

Brookings Institution

.

Finally, allied attempts to use dollar diplomacy to "buy" acceptance of the campaign from potentially hostile countries will also raise the cost. For example, the

International Monetary Fund

agreed to lend Russia $4.5 billion Wednesday, even though the country has met few of the IMF's lending criteria in the past. Russia may push for more if NATO opts for a ground war.

Recently, the

European Union

granted Greece some $5 billion more than expected in funds for the 2001-2006 period, which some pundits saw as the price tag for that country's support for the NATO bombing.