Europe is sliding towards the abyss, and the terrorists know it

Europe is sliding towards the abyss, and the terrorists know it

The terrorists have struck just as Europe is at its most vulnerable – economically as well as politically

By Jeremy Warner6:24PM GMT 17 Nov 2015
http://www.telegraph.co.uk/finance/comment/12001710/Europe-is-sliding-towards-the-abyss-and-the-terrorists-know-it.html

Terrorism is defined by the US State Department as “premeditated, politically motivated violence perpetrated against non-combatant targets by sub-national groups or clandestine agents, usually intended to influence an audience”. The atrocities in Paris at the weekend conform to every one of those characteristics.

All terrorist acts also have the same purpose – to trigger a response and to spread fear. The first of these reactions is already well under way, not just in France – which is scrapping compliance with the European Union’s fiscal compact so as to step up spending on security and defence – but across Europe, Russia and even the US. More concerted international and military action to eradicate Isil now seems highly likely. Politically and fiscally, security has overnight become the number one priority.

Even in Britain, where the Government is about to announce deep departmental spending cuts, there is all of a sudden no shortage of money for combating cyber terrorism. Spending on the police has been cut by 14pc in real terms in England and Wales over the past five years. These cuts may now have to be reversed, with more bobbies on the beat. The same will also be true of the military, where £2bn of extra spending on special forces, drones and fighter aircraft has already been pledged. The Chancellor’s fiscal consolidation plan may soon be unravelling before his eyes.

The second objective – fear – is a much harder thing to measure, at least in terms of economic impact. In a 2011 study, the US economists Gary Becker and Yona Rubinstein found that the fear factor will generally have behavioural effects out of all proportion to the likelihood of actually being caught up in such an event.

Even in Israel, citizens are far more likely to be the victim of a car accident than a terrorist outrage. But that doesn’t stop people altering their behaviour, sometimes quite radically. It is estimated that GDP per capita declined by 10pc in the Basque country after the outbreak of separatist-inspired terrorism.

Drill down beneath the expressions of public defiance that invariably follow a terrorist event, and you nearly always find an underlying atmosphere of insecurity and elevated risk aversion, triggered by fear of repeat attacks. Avoidance of crowded spaces is one obvious manifestation of these behavioural changes. Most people will indeed carry on as before, but it only takes a 10pc reduction in footfall to have quite marked economic effects.

Yet it is to the wider geo-political impact of terrorism that we must look for the longer-term economic consequences. In providing a pretext for war in Afghanistan and Iraq, 9/11 ended up having a massive economic impact far beyond any immediate behavioural changes.

The fiscal costs alone of these wars were vast. On its own, Iraq is estimated to have cost the US $1.1 trillion, and that’s ignoring myriad after conflict costs, which compound over time.

The wars also triggered a series of interest rate cuts in the US and beyond, helping to unleash a dangerous degree of credit expansion which ultimately culminated in the Global Financial Crisis (GFC). You can have guns or butter, it is sometimes said, but not both. America and Britain tried to have both, and paid the price.

It would, of course, be silly to attribute the collapse of Lehman Brothers and the subsequent Great Recession entirely to 9/11. The underlying causes of the GFC were many and varied. None the less, the attacks all too obviously played an important part in the chain of events.

The latest outrages come at a similar point of sluggishness in the world economy, which is once again teetering on the brink of recession. America, Britain and Germany are about the only bright spots.

For an economy that relies heavily on tourism, any nascent recovery in France, which recorded 0.3pc growth in the third quarter, may well be snuffed out by the latest carnage. The terrorists have given President Hollande the excuse he was looking for to abandon eurozone-imposed fiscal constraints, but his escape will only make France’s long-term economic predicament worse still.

In any event, the global economy barely got a mention at last weekend’s meeting of the G20 in Turkey, where the migrant and terrorist crises dominated the agenda. Obviously there was the pre-written communique, which I may well be alone in actually having read.

This paid the customary lip service to implementing agreed growth strategies, lifting productivity, buttressing sustainability, breaking down barriers to trade, furthering the Global Infrastructure Hub – whatever that may be – and so on. But it was hardly reported, and with good reason. Exactly the same thing was said last time, and the time before.

Two years ago, G20 leaders agreed an entirely fatuous plan to boost their economies by the pleasingly round number of $2 trillion through a mixture of restructuring, infrastructure spending and productivity enhancement. Whether any of it has actually happened is anyone’s guess. For what it is worth, officials in Antalya, in various stages of jetlag and inebriation, claimed that about half has.

The G20 may have served some purpose when it was first established in the wake of the financial crisis – and Gordon Brown, the former British Prime Minister, famously “saved the world” with his global call to arms – but it has since become little more than a talking shop, where wildly different and often conflicting national priorities jostle impotently for a voice.

As one participant rudely observes, you can tell it’s midnight in Mexico when the well-fed Agustin Carstens, governor of the country’s central bank, falls asleep in the middle of a discussion about the tortilla food riots.

The bottom line is that virtually everywhere, emerging markets alongside advanced economies, policymakers have run out of road. With public debt in most countries at challenging levels, few political leaders are in the mood for further fiscal stimulus. And with interest rates at zero, there is hardly any space for further stimulating private credit growth either. In the meantime, quantitative easing seems to have largely lost its early effectiveness in boosting confidence and demand.

From both a political and economic perspective, the terrorists could hardly have chosen a more vulnerable moment to strike, with Europe wearied by years of crisis, paralysed by political indecision and shipwrecked by incompetent policy.

If in France the real winner turns out to be Marine Le Pen’s Front National – and it’s not hard to make that case – the latest batch of murderous, Middle Eastern gangsters will have hit the jackpot. They could not have dreamt of provoking such destabilising mayhem. As Europe is busy proving, when things go wrong, everything tends to go wrong all at the same time.

Leave a Reply