The Economics of Terror and the Consequences of the Belgian Attacks

Bachelor of Commerce students from the CAINZ student organisation review the recent terrorist attacks from an economic angle and reveal the wider implications for government.

Acts of terror often stem from a perceived social or political injustice, along with the idea that violence may prove a compelling call for change, and their repercussions are generally extensive. An immediate effect is the emotional fallout and trauma faced by the region’s population. Higher-than-normal incidences of psychopathological issues such as Acute Stress Disorder (ASD), Post-Traumatic Stress Disorder (PTSD) and depression, are well-documented as a consequence of such attacks. Other effects felt by society include the funding needed to support the increased demands for medical help, future safety precautions and clean-up operations. To quote political analyst Loretta Napoleoni, “terrorism is actually a very expensive business”. It carries both a local and broader international impact on various sectors including tourism, government expenditure, and financial markets: the economy in general.

Tourism

Following a terrorist attack, a decline in the number of inbound tourists to the affected region is to be expected. After all, terror and violence do not a good holiday make.

Along with the evocative headline “Paris under siege”, news outlets soon reported on the € 146 m loss for Parisian hoteliers following the November 13 2015 Paris attacks.

Transparency and proximity of European borders has meant that neighbouring countries were similarly affected: in Belgium alone, its capital city Brussels saw an estimated €51.7 million (or $57.9 million) trickle out daily due to a 5-day security lockdown, with Belgium Head of the Brussels Chamber of Commerce Oliver Willocx reporting a 40 per cent cancellation in hotel bookings in the first weekend to follow. Likewise, Belgian airlines reported large losses in demand and cancellation.

The World Travel and Tourism Council pegs a 13-month recovery as the average time needed for affected capital cities to return to prior levels of tourism.

The Economy and Financial Markets

Terror causes fear. That is its objective. More often than not, that is what it achieves. The presence of fear and uncertainty potentially weakens investor and consumer confidence.

One of the worst hit sectors is often the retail industry, for which the impact appears to be two-fold. First, shopping centres are perceived to be vulnerable, resulting in reduced shoppers who fear falling victim to an attack. Second, the fall in consumer confidence results in a decrease in spending, specifically on luxury goods such as cars.

By contrast, staple goods such as pharmaceuticals and utilities are generally unaffected. Evidently, terrorism creates a conservative mindset, encouraging a cut-back on non-necessities in order to prepare for the next ‘worst-case scenario’. The main potential economic impact of this reduction in spending is a fall in the aggregate demand for goods and services, and therefore a decreased GDP, as shown in research conducted after the 9/11 New York attack that found a short-run reduction in American economic growth, which had resulted from consumer apprehension. (However, it is noted that in the wake of the Paris attacks, Europe still saw moderate economic growth, growing 0.3 per cent in the final quarter of 2015, and enjoying overall increased growth at the start of 2016.)

In financial markets, the shock of terrorism creates volatility, increasing investment risk, and leading to a sharp falls in prices. Following the French attacks in 2014, the CAC 40, France’s 40 biggest publicly listed companies, fell by over 1 per cent seconds after opening. After 9/11, the S&P 500 fell a dramatic 11.6 per cent within days. The effects of the rise in volatility and fall in investor confidence are substantial, at least in the short term. Yet, financial markets have shown strength and resilience in recovery, with the New York Stock exchange taking only 13 days to recover from 9/11.

Government Policy

Over the last 15 years, we have seen governments around the world react in largely the same manner to acts of terrorism. Counter-terrorism measures have increased, requiring higher spending and demanding higher government involvement, the most prominent example of which was seen in the United States after the 9/11 attacks. The United States military budget is the largest in the world, with a naturally vast allocation of funds allocated towards counter-terrorism. Of the 2015 defence budget of 560 billion dollars, approximately 60 billion dollars, or about 11 per cent, went towards fighting terrorism. The remainder was largely spent on the remnants of the Afghanistan campaign, itself prompted by the 9/11 attacks, and has, since its conception, consumed over an estimated 1 trillion dollars (source: Financial Times). Because the “cost” of a war omits factors such as future interest payments on war debt, the opportunity cost of spending, and lasting medical costs for soldiers, the true cost is in fact much higher.

A fiscal approach may also be taken in Europe. While the spend is anticipated to be more inward-looking, George Osbourne, the British Chancellor of the Exchequer, has recently promised to spend an extra 3.4 billion pounds on counter-terrorism measures, an increase of 30 per cent. In Paris, President François Hollande has pledged an increase in security and defence spending. In these trying times, the European Union has agreed to waive budgetary and deficit rulings to allow member nations re-armament, the lens of austerity seemingly ignored.

The Consequences of the Recent Belgium Attacks

IHS Global Insight economist Francesca Peck has a vote of confidence in Belgium, suggesting only a “short-lived negative impact on the Belgian economy” via the usual suspects of “consumer spending on recreation and leisure, as well as tourism”, expecting to nip only around 0.1 per cent of quarterly economic growth. While falls in travel and tourism-related companies’ stock prices have been experienced, given the resilience shown by both the French and Belgian public, consumer confidence may only be tarnished rather than ruined.

Clear historical evidence from the likes of the US, London and Paris indicates that while Belgium will likely suffer economically over the next twelve months, this pain is likely to be negligible. Former executive director of the European Travel Commission Nicholas Hall remarked that a long-term effect would be unlikely, provided the region is not subject to another act of extreme inhumanity.

A main concern is current economic woes compounded by the war on terror. The European Union struggled with sluggish economic growth in 2015 (source: Economist), the continent grappling with the after-effects of the Euro Crisis and looming debt from its member nations. With the likes of France openly declaring increased spending on security and military forces as both a defence against, and attack on, terrorism, fiscal outcomes are likely to deteriorate over the coming years if spending is not managed properly. Rabobank economics analysts predict that if border controls become a permanent fixture, the increased transactional costs to all European Union members could be detrimental to economic growth.

In our view, economic and defence policies need to be coordinated and the ‘united front’ so often ostensibly preached through the media must make its presence known within the European leadership caucus, so that the failures of past approaches to counter-terrorism may be avoided.


Banner image: Shutterstock

Originally written by: Tony Chen, Alan Lewis, Jake Fava, Wen Ping Ong are all current Bachelor of Commerce students.

This is an edited version of an article which was first published in this week’s CAINZ Digest.

CAINZ is a commerce focussed student organisation, initially established at the University of Melbourne in 2011 with a remit centred around bridging the gap between classroom theory and industry practice. In addition to producing its own weekly business news publication, the CAINZ Digest, CAINZ hold a variety of networking events and workshops focused on developing professional skills and knowledge of its members. Vision

For a full version of this article, references and to learn more about CAINZ please visit the CAINZ website.

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