A discussion of the events in France and the outlook for the Eurozone can be seen in the November 20, 2015, Bloomberg Business clip, “Why France Is Likely Headed Into Recession.” We see more-negative interest rates as a matter of ECB policy and reduced rates of economic growth in 2016. We have received replies from readers who disagree with our forecast that France now faces the risk of a recession. Among those readers were respected, longtime friends, including economists who described the research done on economies after terrorist shocks.
There has been lots of research performed on this subject over the last 20 or more years, covering the events in the United States after the 1993 World Trade Center bombing, the 1995 attack in Oklahoma City, and 9/11, among other events. We have also seen the economic impacts of the London, Madrid, and Tokyo subway bombings and the Charlie Hebdo attacks in Paris.
In terms of economic effects, how do we distinguish a major terrorism event from what has become an unending sequence of smaller events? In the United States, 9/11 was a major event. Those of us who were in the financial markets and economic and investing businesses remember the period from late 2001 to early 2003. The 9/11 shock rattled an already weakened economic structure and caused serious setbacks to US markets, investments, and economic growth. In the US, we experienced a recession.
Are the rounds of terrorist activity in Paris the French equivalent of 9/11 in financial and fiscal, security, military, and legislative terms? Therein lies a fundamental question.
If the answer is no, then this is just another event in a series of ongoing terrorist activities that have hit developed markets and major economies worldwide. If the populace is inured and has become accustomed to these events, then sequential events will have only mild negative impacts on growth. In that case, the research papers that reflect this outcome are correct.
On the other hand, if this is a major change in France – and we think it is – the French economy will go through a significant adjustment process. It will do so in an atmosphere of increased security, greater civil restrictions, and more military spending. In an environment of economic activity suppressed by fears of additional terrorism, financing that spending will certainly require France to exceed the Eurozone-mandated debt cap.
Border obstacles will multiply. One of the Eurozone’s strengths has been to level the playing field by making its currency universal in 19 countries and by dropping border barriers. Thus, more efficiencies have been created in the European economy. When border barriers come up again and those efficiencies are reversed, there will be higher costs and reduced productivity. In summary, the economic outcome will be negative.
A final note: This week in America we give thanks for our wonderful society – our freedoms, cultural diversity, and traditions. We, too, now confront security concerns. In New York, the police are conducting an active shooter drill. Machine-gun-armed security forces with helmets and body armor can now be seen at the Rockefeller Center tree. They are only one symbol of the heightened security in our country. We can assume that such heightened security activity is ongoing worldwide.
In the United States we continue to move around freely. We continue to have a court system to which we can appeal for our individual rights and protections. We are still trying to strike a balance between increased surveillance, more obstacles, and heightened security on the one hand and the ability to continue to move around freely and safely, on the other. This is a very difficult challenge for governing bodies at every level from the smallest town to the federal government.
In our view, there is a sense of fragility and vulnerability in the air. It is affirmed every time we have conversations with people whose skills include governance, judicial activity, or military security or surveillance. Their sense is that our security measures in the US continue to thwart dangerous or disastrous attacks. They also sense that sooner or later we will not be able to prevent an attack, which will then become another in the sequence of deplorable events that continue to dominate the media. Each attack is a shock and alters the way we conduct our affairs, including where and how we travel.
I would like to wish our clients, professional consulting friends, colleagues in our firm, and readers a Happy Thanksgiving. As we celebrate our great American tradition, we at Cumberland Advisors wish you all the best – and safe journeys to those who are traveling during this holiday week.