In just more than four weeks of war in the Balkans, no serious financial market turbulence has resulted. But there are worries that an escalation of the conflict could further undermine the euro as well as European equity markets.

Whether or not these threats are real is very difficult to judge. Even military tacticians rarely call the course of a war correctly and with the propaganda machines on both sides working at full tilt, the truth can be hard to ascertain.

But if the knock-on financial fallout has been modest so far, there is increasing talk that we may be looking at a long and very possibly intensifying conflict. The change in public opinion in favour of ground troops in both the US and Britain would tend to support this view.

On top of that Serbian President Slobodan Milosevic has already in large measure succeeded in getting rid of the ethnic Albanians and many observers feel he may be getting ready to dig in for a long war against NATO ground forces.

Conversely, there are those who believe that NATO is getting ready to do a deal. They point out that Mr Milosevic's name has been kept off the list of generals and warlords that the West wants to prosecute for war crimes. They also point out that his home town of Pozarevac has not been targeted, so far, by the bombing campaign.

The limited impact of the conflict on the euro to date results from worries about European budget deficits. While the US is carrying most of the cost of the war, it is running a very large budget surplus. Germany and France on the other hand are already considered to be dangerously close to breaching the 3 per cent budget deficit limits set out in the Stability and Growth Pact agreed as part of the introduction of the single currency. The cost of war and of potentially housing hundreds of thousands of refugees could tip the balance.

At the moment the US is estimated to be spending about $30 million (€28.15 million) a day on the aerial bombardment and President Clinton has submitted a $3.25 billion supplementary budget request to fund the Kosovo operation through to the end of September. With a likely US budget surplus of $130 billion this year, the financial markets can afford to ignore the threat to the US economy.

The situation is different in Europe. Not only can economies on this side of the Atlantic afford less but they are much closer to the centre of the conflict and are more exposed through indirect trading relationships. Germany in particular could be affected by its proximity to, and trade with countries such as Bulgaria and Romania which are being adversely affected by the virtual closing of the river Danube.

As the Financial Times has pointed out, companies as diverse as Austrian steel makers and Slovakian ship builders, Bavarian barge operators and Romanian shippers are seeing business hit by the Danube blockage.

Italy may also be affected. It is not alone very close to the conflict but hosts NATO launch pads. On top of that some politicians remain close to President Milosevic, particularly the leader of the United Communists, Mr Armando Cosutta.

Greece is also feeling the effects. Its socialist prime minister, Mr Costas Simitis, is backing NATO although President Milosevic was a friend of many previous Greek prime ministers. Greeks themselves remain very strongly pro-Serb and there is some doubt over whether the Greek administration would support a ground war.

Despite these factors, the conflict's impact is likely to be limited so long as the war is confined to the air. The threat is far greater if ground troops become involved.

It is estimated that deploying 500,000 troops or the equivalent now of about $80 billion. According to Goldman Sachs, this is equivalent to about 0.3 per cent of OECD gross domestic product and is likely to add about 0.2 of a percentage point to interest rates.

However, it is also likely a limited escalation would not have the same impact as the Gulf War. Importantly, there is no threat to oil supplies: not only does this make it less likely that the US will commit ground troops but it also makes an oil price shock very unlikely.

However, this assumes that the conflict remains relatively limited in scope and duration. All bets would be off if the opposite happened. As a US military expert said this week, a ground war in Kosovo would be either lost or long.

Another uncertainty is Russia's approach - unlike the Gulf War there is a risk that it could become involved. Some analysts believe this is more likely should President Yeltsin disappear from the stage. The West does have some sway over Russia because of its negotiations with the International Monetary Fund, but many politicians in the Duma fervently believe in their nationalist duty to protect the Serbs and there are fears that Russian weapons at least would find their way to the Balkans.

This would be likely to lead to some reversal of the peace dividend of the 1990s which is thought to have been worth about three-quarters of a percentage point off interest rates, as well as contributing to climbing stock markets.

And according to many experts, it is equities which are particularly vulnerable to the ongoing war. Equity risk premiums are already trading on the low side.

As Goldman Sachs's Mr Gavyn Davies says, it has to be hoped that there will not be an occasion to see if these predictions prove correct.