Too soon to judge economic impact of Paris attacks

16 November 2015
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European Central Bank Vice President Vitor Constancio said the Paris terror attacks concern him because they add to existing regional challenges, although it’s too early to judge the extent of the economic impact.

“Several factors surround what happened and responses are not easy to find because it then compounds on all the problems we were already facing quite recently,” Constancio said at an event in Frankfurt on Monday. “Markets so far are taking it calmly and not reacting too much. If there would be no further consequences, the impact would not be very significant.”

Stocks in Europe rallied and the euro recovered some of its decline as investors assessed the fallout from the worst terror attacks on European soil in almost a decade. While the murder of at least 129 people in Paris on Friday occurred at a fraught time for global stocks, the history of terror incidents over the past 15 years shows market reactions are often sharp and temporary.

The ECB is already considering whether the euro area needs fresh monetary stimulus as a global trade slowdown puts further downward pressure on feeble inflation. Policy makers will reassess their stance at their Dec. 3 Governing Council meeting, Constancio said.

The Stoxx Europe 600 Index rose 0.2 percent at 1:27 P.m. Frankfurt time after dropping as much as 0.8 percent. The euro was 0.4 percent weaker at $1.0730.

“We are deeply shocked by what happened in Paris,” ECB Executive Board member Yves Mersch told Les Echos in an interview published Sunday. “We express our solidarity, our compassion, and our sincere condolences to the families and friends of the victims.”

Subsequent events

The ultimate effect of the terror attacks depends on subsequent events, Constancio said. If they affect consumer and business confidence and risk aversion, “the consequences can of course be worse,” he said.

Research published in 2004 found that in 177 incidents from 1966 to 2000, per capita gross domestic product growth fell afterward by an average of just 0.048 percent on an annual basis. Subsequent analysis of the attacks of September 11, those on Spain in March 2004 and London in July 2005 show that industrial economies have proven more resilient to terrorism than first feared.

Studies suggest that while specific industries such as tourism, insurance or airlines suffer following attacks and household and company confidence dip, the broader economic impact is often transitory. Still, the caveat is that Friday doesn’t mark the start of a campaign. After the outbreak of terrorism in the Basque region in Spain in the late 1960s, per capita GDP fell about 10 percentage points more than it otherwise might have, according to research in 2003.

Bloomberg

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