The economic fallout from the Paris attacks cannot be measured by stock markets

Andrew Ross Sorkin writes: On Monday, market participants steeled themselves for a steep decline, but the indexes in the United States were up more than 1 percent, and markets in Europe were close to flat.

But that reaction — and the reaction to previous attacks — may belie the true cost of terrorism and, more important, underestimate the potential cost of the Paris killings.

“The aftermath of the Nov. 13 Paris attacks may not in itself prompt extensive market-based volatility,” Citigroup wrote in a report, suggesting that financial markets “treat such developments as idiosyncratic and the unfortunate reality of a world where large-scale carnage has become an almost daily, if sickening, development.”

The report, however, said, “We think this time is different.”

That view is consistent with the opinions of some security experts, who in recent days have said that the attack in Paris represents just one in a continuum.

“We have upgraded the risk of terrorist attacks not only in the Middle East but also in the West, as well as the likelihood of increased international military intervention in IS strongholds in Syria, Iraq and Libya,” Citigroup said, referring to the Islamic State.

The attack in Paris could have far-reaching implications for the future of the eurozone and for companies doing business there. The events in Paris could add to the pressure to close borders in the eurozone. It is also reigniting a debate about privacy and surveillance that could have big implications for technology companies.

Over the weekend, Evercore ISI, the research arm of the investment bank Evercore, published a note to its clients suggesting that the events in Paris could threaten the political support inside Germany for its chancellor, Angela Merkel, who has been a big supporter of open borders, of the Syrian migration and of limiting electronic surveillance on civil liberty grounds.

“The connection between the terror threat and migration flows threatens to rupture the border-free Schengen zone,” the note said, describing the borderless, passport-free zone known as the Schengen area. “It challenges Merkel’s position at home and in the wider E.U., nudging higher the tail risk that Europe’s indispensable leader could fall from power.”

The economic implications of this are significant, to say the least. Evercore ISI even speculated it was possible that Ms. Merkel could ultimately be replaced by Wolfgang Schäuble, Germany’s finance minister, who has seemingly been inclined to let Greece leave the eurozone.

Policy makers and investors estimating the cost of terrorism often miss the larger picture: While the stock market quickly rebounded after Sept. 11, the true economic damage may have been as high as $3.3 trillion. [Continue reading…]

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