INVISIBLE HAND: Europe stands defiant but damaged

INVISIBLE HAND: Europe stands defiant but damaged
By Liam Halligan in London November 26, 2015

The Paris attacks, which struck during the evening of Friday November 13, murdered 129 people and wounded over 300. When stock markets opened the following Monday, France's CAC-40 closed a mere 0.1% down, while Germany’s DAX index actually rose. This was widely reported – and not just on the business pages.

Numerous post-Paris commentaries also recalled that within days of London’s tragic 2005 suicide bombings, which killed 56 and injured 700, the FTSE-100 had fully recovered. We were reminded, too, that just a couple of weeks after 9/11, in which nearly 3,000 perished, American shares were back to their pre-attack high.

Western share indices, after the initial shock of a jihadist whack, often rally in part as an act of defiance. Equity investors generally view the financial implications of terrorist atrocities as short-lived, unlike the human suffering.

While that’s true, I don’t subscribe to the fashionable view that the Paris attacks will have little economic impact and recently heightened geopolitical risk will dissipate. And my scepticism has been compounded, I’m afraid, by Turkey’s quite astonishing decision to shoot down a Russian Su-24 bomber on the Syrian border.

Different this time

Terrorism has sharply increased of late – in Europe, the US, Africa and the Middle East. It killed over 32,600 people last year according to the Global Terrorism Index, a staggering 80% up on 2013. While many argue the economic impact of such atrocities is transitory, Paris could well be different. These attacks struck at the heart of the EU, at a time when the trading bloc was, anyway, in an existential crisis. And while Western central banks have steadied jittery markets in recent years, shooting them full of liquidity, the efficacy of such “quantitative easing” is increasingly in doubt.

Eurozone GDP grew just 0.3% between July and September, down from a mediocre 0.4% expansion the quarter before. This was despite the European Central Bank’s €85bn-a-month QE programme, initiated in March – and subsequent hints this massive monetary stimulus could be cranked up even more.

The French economy is clearly already suffering as terrorist fears discourage shoppers from frequenting retail parks at the busiest time of the year. The now proven ability of Islamic State to strike within West European capitals could impact retail sales in other large EU economies too – with shoppers spooked by a surfeit of armed security guards in malls.

Then there’s the hit to French tourism – which accounts for an enormous 7% of GDP – and the broader travel industry. The recent string of terrorist incidents in Tunisia and Egypt, and Paris itself, has brought “unprecedented levels of disruption” to the sector, according to Peter Fankhauser, chief executive of Thomas Cook.

Even if these effects fade, a more lasting impact could come from tighter European borders. The Schengen zone, allowing passport-free travel among 26 EU countries, is now in serious jeopardy. Several nations had erected temporary border controls prior to Paris, given the unprecedented wave of migrants fleeing Africa and the Middle East – not least Syria. Renewed fears of terrorism could now prompt member states to impose stringent intra-EU security checks, on people and goods. Once in place, such safeguards are tough to remove – despite the negative impact on cross-border supply lines and commerce.

Central and Eastern Europe, in particular, has much to lose from any formalization of this Schengen breakdown. We’ve already seen a sharp response to the migrant crisis from the Visegrad states. Konrad Szymanski, Europe minister for Poland’s recently-elected Law and Justice party, declared in early November that there is “no political possibility” his country will take part in the EU’s migrant redistribution programme. “Poland must retain full control of its borders, asylum and immigration policy,” he said.

Yet eastern EU members now view with alarm reports that five EU states – Germany, Austria, Belgium, the Netherlands and Luxembourg – are considering a “mini-Schengen” between themselves in response to post-Paris security fears.

Links are now being made between migration and terror, and radical parties are making gains across the continent. Greece, meanwhile, remains precarious, with bond markets still jumpy across “the periphery” despite the ECB’s money-printing balm. The Paris attacks have put an already risk-prone Europe on a knife-edge. And that’s before you consider the impact of the UK leaving the EU, which opinion polls suggest is now a real possibility – and particularly since Paris.

Then, of course, we have broader geopolitical risk. Heightened East-West conflict is a real danger – now that a Nato-member has made an unprecedented military strike on post-Soviet Russia. And, if the bombing of IS intensifies and regional tensions spiral, widespread assumptions of a benign, growth-friendly oil price could easily go up in flames.

So, no – I don’t want the terrorists to “win”. But no one should deny that the danger to Europe’s economy has just sharply increased.

Liam Halligan is Editor-at-Large of bne-IntelliNews. Follow Liam on Twitter @liamhalligan