This week has brought extraordinary volatility on stock markets, as investors reacted to every twist and turn of the Iraqi crisis. Share prices plunged earlier in the week, before recovering strongly over the past couple of trading sessions.
Further volatility almost certainly lies ahead next week, not only in share prices but probably also in the oil market, with investors' initial reaction next Monday likely to be shaped by the outcome of the summit in the Azores.
International stockmarkets have gone through three difficult years, following the bursting of the technology-led bubble in 2000. Since then most of the big markets have lost between 40 and 60 per cent of their value and some have done even worse. The uncertainty caused by the Iraqi situation has led to further falls early this year, before the rally over the past two days.
" Fear and greed" are meant to be the emotions which drive the market and the former is certainly dominant at the moment. Investors are unnerved not only by the obvious economic risks - principally higher oil prices and the cost of waging the war and the subsequent reconstruction - but also the wider political questions.
These centre around both the implications of an attack on the wider Middle East and the consequences for US relations with the rest of the world in areas such as trade and investment. Clearly it is too early to attempt to answer such questions, as last-minute diplomacy continues. However it is clear that the risks and uncertainties troubling the markets go beyond the immediate military questions and that the political fall-out from the crisis could have significant long-term economic implications.
If war does start and Saddam is quickly deposed, then one major uncertainty will be removed, but others will clearly remain. Market volatility may thus remain the order of the day for some time.
In such an environment, there is a limited amount that economic policymakers can do. But they must do what they can. It is reassuring to hear that the European Central Bank - sometimes slow to react in the past - is ready to act this time if required. The Federal Reserve Board, the US central bank, can also be relied upon to reduce interest rates further, if this is called for.
Meanwhile the European Commission must realise that even the current extent of economic weakness - particularly in Germany - requires it to show more flexibility in interpreting the Stability and Growth Pact.
Finally, the authorities have a role in overseeing the oil market. There are sensitivities here - a big release of reserves onto the market following the 1991 Gulf War drove prices down well below $20, below OPEC's favoured level. However given the risks of the current situation, the International Energy Agency must stand ready to oversee the quick release of reserves this time around, if market conditions demand it. The world economy is already fragile enough without having to suffer from a prolonged rise in oil costs.