The world was shocked and horrified on Friday to hear about another coordinated terrorist attack on a major city. This time the attackers chose Paris as their target, using a series of bombings and shootings around the city to instill a sense of fear and helplessness into the residents of this beautiful city.
We are still in the early days of the aftermath of the attack and we are still finding out exactly who, how, and why they perpetrated this atrocity. However, if history is a guide, this attack could not only have a major impact on safety and security in the city, but it could also have an extensive negative impact on the economy of Paris. This impact could even spread to other parts of Europe and to other parts of the world.
Terrorist attacks are an example of “asymmetric warfare” because a small group of people can exact an enormous toll on a society for a relatively small investment. Early estimates of the Paris attack are that fewer than a dozen attackers were able to kill more than 120 people around the city. The immediate impacts are striking. Both the Louvre and the Eiffel Tower remained closed throughout the weekend. The rock band U2 cancelled a scheduled concert in Paris. Even the Disney Paris amusement park shut its doors. All of these actions have a large impact on travel and tourism throughout the country.
Within Paris, police and the military continue to cordon off large sections of city streets. Normally vibrant shopping and entertainment districts are virtually empty. One of the few areas seeing a boost in spending is food markets, since many people now are choosing to stay at home rather than risk going out in public.
While this is not the first time in recent history that Paris has been rocked by terrorism, the impact of this attack could be much larger than in the past. The attack on the headquarters of Charlie Hebdo and a kosher market earlier this year, which resulted in 12 deaths, was largely seen as a targeted attack on a specific group. However, the attack on Friday was not only much larger, but it was also much more broad in scope and reach. By targeting a popular sporting event, a concert, and various shops and restaurants, the terrorists are specifically trying to impact the lives of anyone who lives or works in Paris.
Markets operate based on expectations of the future. When something increases the uncertainty about the future it can have dramatic and volatile impacts on markets. The overall cost of this attack could take weeks, months, or even years to fully understand. In the short term, the direct impact of the attacks can be estimated in terms of property damaged, and a reduction in direct economic activity. However, the long-term indirect impacts of the attack could dwarf the short-term indirect impacts.
A decade after the September 11th attacks on the World Trade Center and the Pentagon, the New York Times estimated the total cost of the events to be $3.3 trillion. This is even more striking, given that fact that Al Qaeda spent about $500,000 to mount the attacks. In other words, for every one dollar the terrorists spent, they were able to exact a cost of $7 million dollars on the American and world economies. The costs were comprised of the following impacts:
Physical damage - $55 billion
Reduced economic activity - $123 billion
Homeland Security and related costs - $589 billion
War funding and related costs - $1,649 billion
Future war and Veterans’ care - $867 billion
In addition to these quantifiable costs are many more costs that are largely unquantifiable. What was the impact on oil prices? What was the impact on consumer sentiment? What about the stock market, the housing market, and the commodity and currency markets?
We will not know for several weeks whether the most recent terrorist attack will have a minimal impact on the economy of Paris or on other parts of Europe or the world. While immediate impacts can be swift and severe, if they can be contained and mitigated they can be limited.
The most important thing we can do in times like this is to continue to live our lives. Terrorists thrive on fear and intimidation. We must mourn those who have died but the best thing we can do to remember them is not let the actions of a group of murderers and bullies hold us down.