Blog : The War Premium Just Went Up

by Ed Zwirn on September 14th, 2014

This weekend's news of the beheading of a British aid worker in Syria should up the ante on the war premium going forward and with rapid effect. As of this writing, the U.K. government's emergency committee is about to go into session and you can bet that any outcome of this and subsequent responses across the pond will exude understandable outrage, to say the least.

British Prime Minister David Cameron has called the murder of 44-year-old David Haines, who had been held captive by Islamic State militants since 2013, an "act of pure evil." And you can bet that his government's response will go beyond denunciations to military action.

Developments in the U.K. have a way of either stiffening or loosening the resolve of the U.S. Recall that the example set by the Brits was probably pivotal to U.S. entry into the war against Hitler. The U.S. would have been hard pressed to oppose an empire, however despicable, that included all of Europe.

A more recent recollection makes the opposite point: A little over a year ago, the August 2013 rejection by the U.K. Parliament arguably tipped the balance against a U.S. campaign against the Syrian government that had seemed imminent up until that point. Within days, the U.S. Congress followed suit, and strikes against Syria were rejected.

Back to the present, the U.K. is in the midst of an existential crisis having nothing directly to do with beheadings. A referendum Thursday will allow Scottish voters to decide whether "Scotland [should] be an independent country." Polls suggest the outcome is too close to call, and the British political elite are paying them heed, with representatives of all three major parties canvassing Scotland urging a "no" vote.

If there is any time for the British government to show spine this would be it. Keeping in mind that the IS militants have declared their intention to behead another British captive soon, the public outrage over there is going to ramp up soon, and any vacillating response by the British government could prove fatal in more ways than one.

The U.K. government may be unique in facing an existential crisis exacerbated by an overseas crisis. But similar pressures exist in the U.S. In the wake of the beheadings of two U.S. journalists, politicians are proving generally supportive of President Barack Obama's call for a campaign this time around, and the opposition, if you want to call it that, is generally calling for a greater military response that would not rule out a ground campaign by U.S. troops.

To be sure, there are other frightening points around the globe. The Middle East in general is still a cauldron, with the conflict between Israel and Hamas unresolved, Iraq in tatters and Egypt's government upping repression to avoid losing its grip. The Ukrainian crisis is still a sticky one, despite an apparent cool down. And the stakes over there are high, with nuclear weapons in the neighborhood.

But all of these crises, as dangerous as they are, still have possible benign outcomes because they allow their respective governments some freedom of action.

This is not the case with IS. The IS statement said their most recent beheading was in direct response to the British arming of the Peshmerga against their "state." In effect, this is a direct challenge to the U.S. policy of attempting to recruit allies against IS on the ground. Given that neither the U.S. nor the U.K. are going to abandon this attempt any time soon, expect more pubic executions to come in short order.

It remains an open question how many YouTube beheadings the general pubic can endure without being whipped up into a frenzy exceeding even that of their political leaders. But it is beyond question that the risk premium went up this weekend. This may or may not have a short-term impact on financial markets, but, looking at the long-term, it is hard to see how volatility and disruption can be avoided. Wild stock swings, of course, may prove the least of our worries.

Bear in mind that this is exactly what the perpetrators of these outrages want. Obama and Cameron, however much either one of them wanted to avoid a further entanglement, appear to be getting inextricably dragged in.

And they are getting dragged in. Leaders can talk all they want to about graduated responses to outrages, but are effectively prevented from exercising any gradualism in cases in which the public becomes more belligerent than their leaders. The herd, for better or worse, can be hard to turn around, and good luck this time around.