ISIS terrorism might be a bigger threat to the European economy than Brexit. Tourism has collapsed and economic growth on the continent has stalled in the wake of a series of brutal ISIS attacks over the past year, The New York Times reported.
The overall rate of economic growth in the European Union fell from .6% in first quarter 2016 to .3% in second quarter, The Times reported. That rate of growth has not been seen 2008, the year of the Great Economic Meltdown. France was even harder hit, its economy is stagnating with a 0% growth rate EU economists found.
Not surprisingly, tourism is the hardest hit industry. The number of hotel bookings fell by 20% after the November 13 attack in Paris last year and has not recovered Expedia reported. Expedia CFO Mark Okerstrom noted that bookings again fell by double digits after the terrorist attack in Nice.
Belgium’s economy lost €1 billion ($1.1 billion) as a result of terrorist attacks, that nation’s government reported. Fears of terrorism drove away tourists; and caused the cancellation of revenue generating events such as concerts, carnivals and sports.
Some economists fear the situation will get worse because consumers will stop shopping. That would reduce tax revenues and employment; and it might speed up the “Amazon effect;” in which customers buy online rather than from a store.
To add to the pain governments have had to spend millions more on security. Army and police antiterrorist patrols along the Seine in Paris cost €1 million ($1.1 million a day) according to The Times. The patrols are just part of the French government’s €816 million ($916.47 million) effort to increase security.
The Terrorism Tax
Governments find themselves in a terrible predicament they have to pay more for security and military operations against terrorists, yet they are taking in less tax revenue. It is a phenomenon that American strategist Colonel John Robb predicted back in 2004 and called it “The Terrorism Tax.”
The Terrorism Tax is the price that governments, nations and societies pay for dealing with the effects of terror. Some of the costs such as security and increased military spending are obvious, others such as changes in behavior and patterns of commerce are not.
The actual amount of the Terrorism Tax is hard to compute because it consists of far more than security spending. Some of its components include lost business, decreased economic activity and collateral damage. Costs from this can include the lost wages of the terrorists’ victims, medical treatment for those victims and government payments to victims that become disabled and unable to work. To that we can add the cost of repairing physical damage and securing buildings and infrastructure against future attack.
The Long Term Impact on the Economy
An example of how the terror tax works is an attack on train passengers. This costs society in several ways; first there’s the immediate cost of treating the wounded and lost revenue from disrupted railroad operations. Then there are the long term costs for example; lost ticket revenue because some people stop riding trains out of fear of attacks, and the expense of added security.
Tourism-dependent businesses such as hotels will face lower revenues and higher operating costs. To make matters worse the tourism industry will have a harder time getting finance because investors and bankers will be leery of it. It might cost more for a hotel owner to borrow money, and a publicly traded resort owner might see its stock price fall.
This can have a long term effect on the economy because the hotel buys fewer supplies and lays people off. This leads to a ripple effect, a hotel with fewer bookings will buy fewer supplies such as food. That causes the hotel’s suppliers to reduce operations and buy less from their suppliers.
Naturally many people will wonder if terrorism can lead to a long-term economic downturn. Nobody knows the answer to that because there will be more spending and activity in some areas of the economy.
There will be more jobs for soldiers, security guards and policemen and more business for manufacturers of munitions, military equipment, weapons and uniforms. Yet it is not clear if that activity will make up for what was lost to terrorism. Since this activity is dependent on increased taxes or deficit spending it will have long term economic consequences.
How Nations React to the Terror Tax
The long term effects of the terror tax are determined by how governments’ react to it. History shows us that are three possible responses to the Terrorism Tax, none of which are pleasant.
Examining these responses will show us how Europe might react. Some past responses to the cost of terrorism include:
Business as usual
Simply soldier on and ignore the terror. The hope is that the terrorists will either exhaust their resources or get tired of the war and quit. The best example of this occurred in the 1970s, 1980s and 1990s when the British soldiered on through the IRA’s terror campaign. The terror eventually petered out because it was having no effect; and the IRA’s leaders settled for meaningless but face-saving negotiations. Such a strategy only works when the terrorists have limited resources and are unwilling to engage in wholesale carnage.
Pay the terrorists off
Simply pay the terrorists not to do bad things. This strategy can sometimes work; France was able to get hostages released by paying Al Qaeda $58.1 million (€44.08 million) between 2008 and 2013. The drawback here is that terrorism is being rewarded. Another is that the terrorists have to be willing to go along. Fanatics interested in martyrdom might simply ignore the payments, or worse use them to buy more weapons. Payoffs and ransoms make some economic sense, but they are ethically questionable and unpopular.
Wage all-out war on the terrorists
This strategy is emotionally satisfying but it is hard to execute; even for more nations with vast resources such as the USA. Long term wars with terrorists create other problems such as the need to occupy foreign territory, strained relations with allies and the cost of military operations. Another problem America has run into is what to do with captured terrorists. Many suspected terrorists are still locked up at Guantanamo Bay; enjoying a life of ease at the expense of the American taxpayer, 15 years after September 11. Smaller nations like Belgium may simply lack the resources for an all-out war on terror. Even the United States is weary of it and wants a way out. Unfortunately, ISIS seems to crave an all-out war.
Try to negotiate a compromise
This only works when the other side is willing to compromise. Negotiation worked with the IRA because it had nothing to lose. Negotiations between Israel and the PLO only made the situation messier and more complicated. One reason why the Palestinian peace process failed was that it discredited the PLO; which was supplanted by newer more radical organizations. Israel is now paying the tax to other groups like Hezbollah. A final problem is that negotiation might encourage more terrorism.
History shows us that there are few good solutions to the Terrorism Tax. Europe might have to learn how to live with this tax for the foreseeable future.