Paris: what’s next the terror attacks?

Unfortunately, it also cannot be ruled out that further terrorist acts will be perpetrated in France, other European countries or beyond in the next weeks and months. The fact that terrorists were able to strike in such a seemingly coordinated manner despite the intensified counter-terrorism efforts that have been underway since the attacks in Paris in early January suggests that terrorist capabilities may be greater than had been assumed to date. The terrorist attacks in Paris are likely to have noticeable political consequences in France, the European Union more broadly and possibly at the geopolitical level as well. Economic consequences are likely to be more limited, in our view, but investors should be prepared for possible initial risk-off reactions of financial markets. These might, however, be met with supportive policy measures, in particular by the European Central Bank (ECB). France: Increased pressure on Francois Hollande’s government; right-wing to benefit Even if the immediate effect of the attacks in France is likely to be an enhanced sense of, and calls for, solidarity, they are likely to add to the political pressures on the government of Francois Hollande whose popularity is already very low due to the weak economy. While the main political parties have suspended their campaigns for the regional elections in December, we would expect right-wing political forces, and especially the anti-immigrant and anti-euro Front National, to be strengthened in these elections as well as over the medium term. That said, it is clearly too early to predict the outcome of the French presidential elections which will take place in April 2017. Much will depend on political and economic developments up until then. The most immediate reaction of the French government will likely be to boost counter-terrorism efforts, including via added spending. Longer term, pressures to address social and economic issues in the French suburbs will increase. As regards the shorter-term economic impacts, we would expect some setbacks in foreign tourist visits to France, and there may be a general setback to consumer and business sentiment. Overall economic effects are likely to remain limited, however, in our view unless the security situation worsens. European level: Domestic political stresses in Germany and elsewhere, but potential enhancement of European cooperation The terrorist attacks in Paris are also likely to have broader political effects in Europe. On the positive side, the cooperation of security forces in Europe is likely to be strengthened. This will probably require a tightening of border controls. That suggests, in turn, that the Schengen accord, which provides for free mobility of people among its members, will, at least temporarily and partially, be suspended. However, it is very unlikely, in our view, that these accords will be formally cancelled, and we would not expect the partial constraints to have major economic effects. Beyond improved cooperation in security matters, we would also expect a general increase in government attention and budgets for spending on security matters. As significant may be the domestic political effects in various European countries. The focus is, in particular, on Germany and its policies regarding refugees. Although many of the refugees are themselves victims of the forces that appear to have been responsible for the attacks in Paris, political tensions due to the seemingly uncontrolled influx of refugees are likely to increase further. According to news reports at the time of writing, at least one of the attackers in Paris appears to have entered the EU as an asylum seeker, which is likely to exacerbate the debate. Political pressures to limit the flow of refugees will thus increase. While coordination at the EU level is likely to improve (and the enforcement of the Dublin Treaty should thus improve) it remains to be seen to what extent recent efforts to enhance the coordination with the governments of Turkey and some African countries will yield positive results. In general, domestic tensions over the refugee issue are likely to remain high for some time at least, and political leaders including German Chancellor Angela Merkel will thus likely remain under pressure. Geopolitics: Hopes for enhanced cooperation on Syria, but regional security situation to remain very unsettled The attacks in Paris – following just days after an apparent terrorist attack on a Russian airliner – suggest that recent efforts to find a political solution to the conflict in Syria and the broader region might be enhanced. The latest round of negotiations of the major global and regional powers in Vienna has resulted in some pledges to enhance cooperation. Military coordination between the United States, France, Russia and Turkey may also improve to some extent. That said, it seems a long way until stability can be re-established in Syria and the broader region and deep-seated conflicts are resolved. It thus seems unlikely that terrorist threats that result from these issues will soon subside. Financial markets: Immediate negative impact on risk assets likely; possible support from the ECB It seems likely to us that the perception of heightened political and economic risks will lead to a short-term, negative reaction in equity and credit markets in Europe, with some contagion globally. Although markets have already retreated somewhat in the past days, prices are still up sharply from their summer lows. Hence a setback in response to a political shock of this scale and significance is likely. The potential extent and duration of such reaction is difficult to judge. Past experiences with terrorist strikes in Europe, including the Madrid bombings in March 2004 and the attacks on UK public transport systems in July 2005, suggest that the financial market impact of even the most severe attacks tends to be short-lived. Longer history would suggest that the political and economic effects will determine whether there will be a more prolonged financial market impact.