France’s 9-11 Economic & Political Consequences

Beyond the horrific deaths, injuries, and panic from seven coordinated terror attacks in Paris, the consequences of France’s 9-11 will likely be a serious deflationary recession and right-wing nationalism spreading across Europe.

Preliminary EU economic data released on November 13, just hours before the attacks, showed that France had returned to positive economic growth in the third quarter, while the German economy only slowed slightly. Finance minister Michel Sapin told AFP, France will grow “by at least 1.1 percent” for 2015, adding that he believed the country had “exited the period of extremely weak growth that had lasted too long”.

The highly respected Lombard Street Research commented, “The euro area is seeing a solid and steady recovery. The expansion is becoming better balanced by country.”

But Europe’s “green shoots” evaporated when French President François Hollande declared the first nationwide state of emergency since the 1954-1962 Algerian War and closed the borders for the first time since 1944 in twin moves designed to prevent the perpetrators of the attacks from fleeing the nation.

The macroeconomic impacts of the Paris attacks will be similar to the U.S. September 11 attacks. U.S. Consumer Confidence Index plunged from 114 in August 2001 to 97.6 in September and collapsed to 85.5 in October. Unemployment increased 0.6 percent from September to October. Heightened security led to air travel and tourism suffering double digit declines. The uncertain business climate caused a recession and commodity prices to plummet, as many businesses slashed hiring and tabled new capital investments in favor of stockpiling cash.

Hollande’s Socialist Party, like President Bush and the Republicans after 9-11, will crank up military commitments in Iraq and Syria. France had already been carrying out airstrikes in Syria, and their only aircraft carrier, the Charles de Gaulle, was due in five days to sail to the Persian Gulf for actions against the Islamic State prior to the attacks.

But France will now “deepen its involvement” after the Islamic State took credit for eight members “wrapped in explosive belts and armed with machine rifles” attacking at least seven sites and killing at least 123 people, according to Stratfor.

With the French voting next month for regional elections, Marine Le Pen’s right-wing National Front was already leading in opinion polls to win in the Nord-Pas de Calais region, and her niece, Marion Marechal-Le Pen, was leading in some polls in the Provence region. The National Front will be rewarded for their long history of hostility to Muslim immigration and demands for restoration of border controls.

The French center-right UMP, led by former President Nicolas Sarkozy, relaunched the party in May as “The Republicans” in a rebranding effort to be seen as more anti-socialist before the French presidential elections in 2017. With French public opinion now bolting to the right, The Republicans will lead centrist parties across the EU in a move right to avoid being overtaken by what had been fringe nationalist parties.

The rebellion against EU open-border policies began on November 11, when the Czech Republic’s deputy prime minister, Andrej Babis, said that since Greece had not been controlling its borders to a sufficient extent, it should be ejected from the Schengen zone, which allows free movement of people in Europe. Slovenia later announced they were fencing off their border with Croatia.

Poland announced that in light of the Paris attacks, Poland cannot accept EU quotas for redistributing 160,000 asylum seekers now in Greece, Hungary, and Italy. France had agreed to accept 31,000 and Germany 40,000, but the attacks will strengthen arguments to halt immigrant flows by closing the borders of Germany, Sweden, and much of Central and Eastern Europe.

EU focus on security and war with the Islamic State will have seriously deflationary impacts. Inflation had already fallen to zero percent, and the European Central Bank told the EU  Parliament’s economics committee the day before the Paris attacks that “signs of a sustained turnaround in core inflation have somewhat weakened” due to persistently low oil prices, a stronger euro earlier this year, and anemic global growth.

The ECB suggested on November 12 that to fight deflation they would increase the quantitative easing scheme launched earlier this year to buy more than $1.3 trillion of EU member sovereign bonds at the rate of $65 billion per month through 2016.

But faced with a deflationary crash, the ECB will immediately add massive amounts of liquidity to the European banking system in a similar manner as the Federal Reserve’s quadrupling direct lending to financial institutions after 9-11 in an effort to avoid setting off a domino chain of financial institution bankruptcies.