The Economics of Terror and the Consequences of the Belgian Attacks

April 11, 2016
Editor(s): Sean Brown
Writer(s): Tony Chen, Alan Lewis, Jake Fava, Wen Lin Ong

While acts of terror stem from a perceived social or political injustice, along with the idea that violence may prove a compelling call for change (Ahmed, 2015), its repercussions are generally far more extensive. What comes to mind first after a terrorist attack often relates to the emotional fallout and trauma faced by the region’s population. This is definitely a relevant concern, where higher incidences of psychopathological issues such as Acute Stress Disorder (ASD), Post-Traumatic Stress Disorder (PTSD) and depression, have been well-documented as a consequence of such attacks (Grieger, 2006). But one must pause to consider, however, about the funding needed to support the increased demands for medical help. Then, expanding on that thought, what to make of the safety precautions to guard against future attacks, as well as the finances required to fund the clean-up operations in the wake of one. 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, the financial markets and the economy in general.

Tourism

In the aftermath of a terrorist attack, it is perhaps not a huge leap to expect a decline in the number of inbound tourists. After all, terror and violence do not a good holiday make. Along with the evocative headline “Paris under siege” (Schram, Vincent & Fredericks, 2015), news outlets soon reported on the € 146 m loss for Parisian hoteliers following the November 13 2015 Paris attacks (Coldwell, 2016). 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 (Mindock, 2016) and the Belgium Head of the Brussels Chamber of Commerce Oliver Willocx reported 40 per cent cancellation in hotel bookings over the weekend of the initial (Walker, 2015). Likewise, Belgian airlines reported large losses in demand and cancellation.

That said, the World Travel and Tourism Council pegs thirteen months as the average recovery time for returning to prior levels, after analysing data from terrorist attacks in major European capitals over the recent years. In fact, the 2005 London subway bombings were noted to have “no impact on tourist arrivals in the U.K. at all” (Zillman, 2015). An IBTimes article exploring the longer-term repercussions of 9/11 sheds light on another unforeseen impact on tourism, noting how millions of visitors alight in New York City, armed with a sense of morbid fascination to take a peek at Ground Zero and drop by the 9/11 Memorial and Museum in Manhattan (Poladian, 2015). Of course, increased international patronage in the wake of such heartbreak is hardly a cause to celebrate, and while somewhat transitory, the effects of terrorism on the tourism industry are far from painless.

The Economy and Financial Markets

After tourism, one can then consider something a bit less obvious: the impact on the economy and global and domestic financial markets. Nevertheless, the horrific shrieks of terror do echo into this realm of society. Terror causes fear. That is its objective. More often than not, that is what it achieves. The presence of fear and uncertainty inevitably weakens investor and consumer confidence (Johnston and Nedelescu, 2005). One of the worst hit sectors is the retail industry, which is impacted in a twofold manner (Picardo, 2016). First, shopping centres are perceived to be vulnerable. Therefore, people shop less, out of fear of becoming the next victim (Beck and Willis, 2005). Second, the fall in consumer confidence results in a decrease in spending, specifically on luxury goods such as cars. In contrast, staple goods such as pharmaceuticals and utilities are basically unaffected (Picardo, 2016). Evidently, terrorism turns households to a conservative mindset, encouraging a cut-back on non-necessities, in order to prepare for the next ‘worst case scenario’. The economic impact of this reduction in spending is a fall in the aggregate demand for goods and services, and therefore a decreased GDP (Johnston and Nedelescu, 2005). It seems like a far stretch to say a single act of terror can negatively impact the economy on such a holistic and dramatic level. However, research after the 9/11 attack found that there was a short-run reduction in American economic growth resulting from consumer apprehension (Makinen, 2002). Contrastingly though, in the wake of the Paris Attacks, Europe still saw moderate economic growth, growing 0.3 per cent in the final quarter and increased growth in the start of 2016 (See Kit, 2016).

In financial markets specifically, the shock of terrorism creates volatility, increasing investment risk, leading to a sharp fall in prices (Johnston and Nedelescu, 2005). After the French attacks in 2014, the CAC 40, France’s 40 biggest publicly listed companies, fell by over 1% seconds after opening (Doug, 2016). After 9/11, albeit an extreme case since the terrorist attacks targeted the World Trade Centre, the epicentre of global financial trade, the S&P 500 fell a dramatic 11.6% within days (Johnston and Nedelescu, 2005). Nonetheless, the effects of the rise in volatility and fall in investor confidence are substantial, at least in the short term. Yet, financial markets seem to show strength and resilience in recovery (Makinen, 2002), with the New York Stock exchange taking only thirteen days to recover from 9/11, (Johnston and Nedelescu, 2005). This is a credit to financial markets’ ability to quickly and logically internalise information after a shock and incorporate that information into prices to promptly return to normality (Johnston and Nedelescu, 2005). Terrorism undoubtabley has a very emotional impact on society. However, financial markets provide a paradigm for how to recover with logic and reason.

Government Policy

How government policy reacts to terrorism is also something that must be considered. Over the last 15 years, as the threat of terrorism has grown globally we have seen governments around the world react in largely the same manner. Counter-terrorism measures have increased, requiring higher spending and demanding higher government involvement. Of course, the most prominent example of this was seen in the United States after the 9/11 attacks. The United States military budget has long been the largest in the world, and naturally the nation also has a vast allocation of funds towards counter-terrorism. Of the 2015 defence budget of 560 billion dollars, approximately 60 billion dollars, or about 11%, went towards fighting terrorism, with approximately 90% spent on the remnants of the Afghanistan campaign.

Indeed, the Afghanistan War itself, prompted after the 9/11 attacks, consumed a huge amount of money, estimated at over 1 trillion dollars by the Financial Times, a likely understatement, as 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. Nonetheless, this already exceeds the inflation adjusted cost of the Marshall Plan, which helped rebuild a torn-down Europe post-World War Two. Needless to say, the United States has a very unique military culture, and smaller governments around the world are unable to spend nearly as much money on counter-terrorism measures.

However, if we cross the pond to examine how Britain has approached counter-terrorism in recent years, both similarities and marked differences can be perceived. After the London Bombings in 2005, which arose domestically, Britain understandably reacted with changes in its domestic security policy, with quite a different mindset to that of the US’s domestic policies. Blair introduced new policies to improve the nation’s collective security which, unfortunately yet inevitably, came with an individual liberty trade-off. One of the more controversial of these was the Terrorism Act of 2006 which allowed state to hold terrorist suspects without charge for twenty-eight days, while freezing all their assets. While many Western nations, including Australia, have already introduced laws of this nature, by now it is likely that Europe will respond to the recent terrorist attacks with this inward-looking lens. Particularly given the refugee population influx, we would expect governments to try and further ramp up security efforts especially in the cyber-sphere, where much of the planning and communication now occurs.

However, this is not to suggest that a fiscal approach won’t also be taken in Europe. Any policy requires funding and, as evidenced by the United States’ spending, governments have long been happy to spend in the name of security. In fact, this has already occurred in Europe. 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%. Osbourne has formerly been known for pursuing austerity and debt reduction measures, so it will be interesting to see if this trend continues into the future. A similar storm is brewing in Paris, where Hollande, the President of France, has pledged an increase in security and defence spending. In these trying times the EU has agreed to waive budgetary and deficit rulings to allow member nations re-armament, the lens of austerity seemingly also ignored.

The Consequences of the Recent Belgium Attacks

Given the previous information, one can now turn their lens to the recent terrorist attacks in Belgium and make adequate predictions. Given the attraction of Islamic extremists to the ironically unorganised political centre of Europe and the nations’ weeping shrapnel wounds from the Paris attacks, Belgium may be the epicentre of a European meltdown never seen before.

The HIS 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” (See Kit, 2016), expecting to nip around 0.1% of quarterly economic growth (Pylas, 2016). This is almost a given, especially in regards to the proximities in time and location to the Paris attacks. With tourism representing 5% of Belgium’s GDP in 2015, Belgium’s path to economic recovery is likely to be slighted. This was reflected in the financial markets, with falls in travel and tourism related companies’ stocks. However, given the resilience shown by both the French and Belgian public, consumer confidence may only be tarnished rather than ruined, although this is somewhat offset by the compounding effect of each additional attack on the European Union.

Clear historical evidence from the likes of the US, London and Paris indicates that Belgium will suffer economically over the next twelve months, however this pain will be negligible. As aforementioned, Paris saw similar reductions in economic activity to what Belgium is predicted to experience, whilst the UK held itself together in the midst of the London Bombings (Pylas, 2016).

 

Former executive director of the European Travel Commission Nicholas Hall says “I don’t think it’ll have a long-term effect”, provided the region is not subject to another act of extreme inhumanity. Furthermore, most persons from expats to Contiki cultural tour travellers go to places like Belgium for a specific purpose, be it to experience the rich culture and history of the nation, or to engage in business activity with one of the many European economic and political boards and organisations. Travel to Belgium may not be so substitutable as people may think, giving some hope that the travel industry will recover relatively quickly.

Of far greater concern is how the present attacks will play out in the present political calamities of the European Union. A sickening perpetual cycle exists within the EU: the open-border policy to Middle Eastern immigrants and huge loss of territory in Syria and Iraq has persuaded Islamic extremists to look towards exportation of their violent acts (Time). Strategic attacks in big cities, not enough to cause chaos, but enough to strike fear in any rational person, is spurring an unprecedented xenophobic and anti-immigration views into both the general public and strengthening political parties, such as Alternative for Deutschland. As a result, the minority Muslim groups, most of whom are foreign born, struggle to feel comforted and welcome into what they thought would be a safe abode (IBTIMES). Essentially, Europe is making the Islamic extremist recruitment process easier, as groups such as IS swoop in with an offer some Muslims feel is the better option. Huge political tensions divide the European caucus (Reuters) as the likes of open-door policies spur both support for the moralities of protecting other civilians, or resolving what many right-winged parties deem as a weak spot in European policy and security.

Not only does political instability rock the continent, but increasing economic woes interfere with the war on terror. The European Union struggles with sluggish economic growth over the past year (Economist) as the continent still grapples with the after-effects of the Euro Crisis and looming debt from its member nations. Economic instability is hardly the thing needed, and yet the alarming frequency of such attacks could spur such an outcome. With the likes of France openly declaring increased spending on security and military forces as both a defence and attack on terrorist attacks, fiscal outcomes are likely to deteriorate over the coming years if spending is not managed properly. Furthermore, Rabobank economics analysists predict that if border controls become a permanent fixture, the increased transaction costs to all European Union members could be detrimental to economic growth (Erken, 2015). Adding to Europe’s woes is the spurring of the Brexit movement within the British public, who increasingly view Europe as both a fiscally and politically irresponsible and unstable territory (Dougherty, 2016; Hanrahan, 2016). If the Brexit vote were to succeed, well-established and relatively cheap trading ties between the United Kingdom and Europe will immediately be badly damaged, having severe economic consequences for all parties involved in the short term (Bremmer, 2016).

Conclusion

All of this remains to be seen. But with many predicting 2016 to be the year of dramatic shifts in the games of global politics and hostilities, the Belgium attacks could be all but the beginnings of a colossal calamity in European tensions. Ultimately, The European Union must do what it can to protect as many lives as possible, Muslim or non-Muslim, whilst remaining within the bounds of moral decency. Policy needs 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 can be avoided.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.