The attack against Charlie Hebdo on January the 7th may have disrupted the expected recovery in 2015 in France?
The decline of the Euro, the dramatic drop in oil price and the highly accommodative monetary policy from the ECB are the ingredients of the recovery that will emerge in France and Euro area throughout this year.
However, the attack dramatically increases uncertainty that could radically change behavior limiting then the expectations of recovery.
To highlight this debate we can observe two situations that can be perceived as close to that known currently in France.
In 1990 during the invasion of Kuwait by Iraq, the shock is such that the consumer confidence indices have dropped deeply. Households’ consumption decreased immediately behind that. Olivier Blanchard, the current chief economist of the IMF, stated in an article (Consumption and the recovery of 1990-1991 – AER May 1993, but with subscription) that this downturn was a key factor in the US recession of 1991.
In 2001 after the attacks of September 11, the uncertainty has been mastered by the quick and strong reaction from the US government and institutions to mobilize American citizens. The economy was in recession but officially went out of this one in November 2001, just two months after the attacks.
Beyond the purely political aspect (essential), the Government had taken emergency measures (urgent expenditures of USD 40 billion passed on 14 September) and a more accommodating monetary policy with lower interest rates (decline of 175 bp for the fed funds rate between August and December 2001). The target here was to limit the negative impact of uncertainty on private demand.
Attacks seen in Madrid on March the 11th 2004 and in London on July the 7th 2005 did not have a strong impact on economic activity. The GDP profile was not changed at this period.
The active management of uncertainty by the US government facilitated a more proactive behavior of citizens (see here). In 1990 the management of this uncertainty was much more complex because the situation was not spontaneously manageable by the government since the events were happening in the Middle East.
It is this behavior from 2001 that must inspire France and Europe, as uncertainty is a global concern. This uncertainty and the risk associated with the current situation can be measured in the mobilization observed throughout the old continent with huge gatherings.
The government, European governments and institutions must implement a highly reactive strategy. The persistence that could be associated with a large uncertainty would have a very negative impact on behaviors and thus on economic activity. This should also apply to the ECB; its strategy must further facilitate the adjustment of financial markets.
We do not know the future including the likelihood of similar events to those attacks in Paris. That is why we must reduce the current uncertainty. Immediate action has to ensure that such situations would not disintegrate French society or European societies. Fear must not win. This is a necessary condition for the activity to resume thus promoting a more positive dynamics of the economy and employment
A French version was published on Optionfinance.fr
Available here http://bit.ly/Att-Reprise