The United States has had enough, and the president has decided to impose economic sanctions on Libya. But the effect of these sanctions is likely to be little more than symbolic, particularly in view of the fact that our European allies seem unlikely to join in this effort. Economic sanctions don't work, they argue, and besides, the United States cannot expect them to prohibit profitable business relations with Libya solely on the basis of the tenuous circumstantial evidence linking Col. Muammar Qaddafi to the murders in Vienna and Rome.
There are some minimal sanctions, however, that we could expect the European governments to agree to because they would actually benefit economically from them, even though they may not recognize or admit it.
Not all trade is profitable for Europeans. Almost 20 percent of West European exports to Libya are financed with export credits that are officially supported and subsidized by the West European governments, particularly West Germany and Great Britain. The value of such export credit subsidies to the Libyan government exceeds $40 million to $50 million per year. You can train a lot of terrorists for $40 million.
The form that such subsidies take is usually a repayment guarantee to West European businesses or banks that give credit to Qaddafi. Such a guarantee affords the Libyans preferrential access to West European financial markets to finance imports. With such a guarantee, Qaddafi can borrow deutschemarks in Frankfurt or pounds sterling in London at interest rates that are lower than what most West German or British firms have to pay. The outstanding balances on such guaranteed credits from West European governments to Libya have for the past four years fluctuated between $1.2 billion and $2 billion, which corresponds to $350 to $570 for every Libyan man, woman and child.
It is in the Europeans' interest to stop subsidizing the Qaddafi regime through preferential trade credits. True, discontinuing such subsidies might reduce the exports of those European firms that are in the business of providing Qaddafi with anything from management services to bombs and ammunition. Also true, the economic pinch of such a sanction is too slight to make Qaddafi wince. Libya can probably borrow from private banks even without government guarantees, albeit at a higher interest rate, or choose to offset any losses in officially supported export credits by selling more oil on the open market.
Nevertheless, a removal of Western credit subsidies might have some effect. Given that such subsidies are common practice throughout the world, and that the entire East Bloc as well as many other totalitarian regimes and dictatorships benefit from them, refusing them to Qaddafi would serve as an indication that he doesn't even qualify for that less-than-illustrious group.
Furthermore, if Qaddafi were forced to pay the risk premiums that private bankers would attach to unguaranteed loans to Libya, he would have to bear the costs of his irrational actions. Each new terrorist outrage, each additional confrontation with the United States would increase the probability of violent conflict and thus make Libya a worse credit risk in a private banker's eyes. That would lead to increases in Libya's cost of borrowing.
Finally, increased oil sales by Qaddafi could only be welcome, because they would reduce the West's energy bill. It is also difficult to imagine any action on Qaddafi's part that would be more resented by the Arab countries that currently seem to support him.
The main benefit, however, of concentrating on a removal of export subsidies as minimal sanction is that such a proposal cannot be refused by the Europeans on the same grounds as the more comprehensive sanctions requested by the Reagan administration. If removing the subsidies has no effect, then instituting the subsidies in the first place had no effect either. The relevant question becomes why the Europeans subsidize credits to the Libyans in the first place.
More important, removing the subsidies cannot be interpreted as an unwarranted intrusion into the free market by the government. Quite the contrary: it amounts to a freeing of trade between Libya and Western Europe. Any European banker who would like to lend to Qaddafi should be free to do so. Only don't expect the European taxpayer to come to his rescue if the loans are not repaid.
Admittedly it doesn't speak highly for Western solidarity in the face of terrorism if all we ask our allies to do is stop subsidizing the countries that harbor the terrorists. However, it is certainly better to ask for and obtain a little cooperation than to ask for a lot of cooperation and be refused.
The writer is a senior economist at the Rand Corp.