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Green in a red context



Earlier this week we issued our annual Outlook publication. In Outlook 2016 we discuss the ongoing recovery in the eurozone in detail. The eurozone is slowly but surely shaking off the after-effects of the euro crisis. However, this positive development is marred by many risks. Last weekend’s terrorist attacks in Paris are evidence of this. Some of the reports for Outlook 2016 were already at the printer’s when the horrible events that unfolded in the French capital made it abundantly clear that one of those risks has reared its ugly head.

Europe is at war with IS. The Netherlands, alongside its partners, is actively fighting IS in Iraq. To date, this was a war fought at a distance and the European contribution was largely limited to committing combat aircraft. The attacks in Paris have changed things palpably. It is evident that IS is trying hard to move the battleground to the European continent. Unfortunately, with the attacks on innocent civilians they have succeeded in doing so. Only time will tell whether the attacks in Paris are a regrettable low point or just the start of a longer violent campaign.

At this time, our thoughts go out first of all to the victims and their families. They are the ones that are feeling the pain of the attacks the most. The broader impact of the attacks and the structural consequences for society and the economy as a whole are unclear at the moment. Several analysts have already pointed out the negative effects of the attacks on the climate of trust and the impact this will have on tourism, especially in France. This will also inevitably have a knock-on effect on other countries living under an increased threat of terrorism. However, the experience of countries that regularly deal with such threats shows us that people are very adaptable. The United Kingdom has been subjected to many terrorist attacks over the course of decades. Every time, after the initial shock and condemnation, life, tentatively at first, returned to normal. As the Queen so pointedly put it after the most recent bombings in London: “keep calm and carry on”. Even in a country like Israel, which is in a permanent state of war, most people live a normal life, albeit at a much higher state of alert than we are used to. This adaptability and resilience underlines the fact that terrorism can never force a free society to its knees. However, polarisation in politics and society as a whole may very well increase as a result of the terrorist attacks and the fear of new ones. Sowing that fear and discord is exactly what IS wants to achieve.

The economic consequences of the attacks are still incalculable. If more attacks of this magnitude were to happen, larger and more structural negative effects on the climate of trust in Europe cannot be excluded. The resulting heightened security measures will most probably have a significant effect on the economy. This is not so much due to the inevitably higher costs for security and counter-terrorism, as to the possible reintroduction of border controls within the EU. Free cross-border traffic is an important element of the European internal market. Its introduction gave international trade within the EU a major boost. Tighter border controls means long queues of trucks waiting at the borders. If maintained over a long period of time, they would certainly derail free trade and bring the economic recovery to a shuddering halt. Countries such as the Netherlands and Belgium, whose economies depend to a large extent on international trade, would be hit the hardest. More extensive controls at airports will also have their negative effects. Beyond that, there will be unforeseeable effects, depending most of all on whether there are more attacks in Europe.

Despite the Paris attacks, we remain confident that the recovery in the euro zone will continue in 2016. However, the recovery is still in its early stages and quite fragile. A sharp deterioration in the climate of trust will definitely hamper recovery. Unfortunately, the chances that the European revival will be damaged in the aftermath of the terrorist attacks in Paris have increased. It is impossible to exclude further attacks in the near future. Although the chances may still be relatively small, it is a risk that comes with a huge impact. This means that the European recovery is now exposed to more downside risks.

Related content: Outlook 2016

Wim Boonstra
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 5128 1405

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