The Economic Consequences of Terrorism for the European Union

By Dr. Tim Krieger, University of Freiburg, Department of Economics, and Dr. Daniel Meierrieks, WZB Berlin Social Science Center.


European Commission

Abstract

In recent years, a number of major terrorist attacks in EU member states has put the fight against homegrown and international terrorism at the top of the agenda of European policy-makers. This paper analyzes the costs of terrorism in the European Union from both a theoretical and empirical perspective in order to evaluate counter-terrorism policies by comparing their costs and benefits. Two important policy implications can be derived from our exercise. First, individuals’ behavioral predispositions typically result in a biased perception of the risk of terrorism leading to too high a demand for counter-terrorism measures relative to what the objective probability of terrorist events suggests. This results in a tendency to favor repressive over preventive measures against terrorism. Second, uncoordinated European policies against terrorism have the potential to undermine the effectiveness of counter-terrorism measures. If there is a justification for the existence of the European Union (which an increasing number of populist parties in Europe seems to doubt), then it is to provide supranational answers to coordination failure in European counter-terrorism policies.


1. Introduction

In recent years, a number of major terrorist attacks in EU member states has put the fight against homegrown and international terrorism at the top of the agenda of European policy-makers. The attacks took place not only in European capitals such as Berlin, Brussels, London, Paris and Stockholm, but also in more peripheral places such as Ansbach in Germany or Trèbes in France. According to the Global Terrorism Index (2017), the year 2016 was the deadliest year for Europe in terms of terrorism in the post-9/11 era. There were 630 terrorist attacks with 826 victims. Since 2002, Turkey, France, Spain and the United Kingdom have suffered the most from terrorism, accounting for 67 per cent of attacks and 90 per cent of fatalities. More recently (2014-2017), the United Kingdom, Germany and France were the most affected countries. Overall, however, Turkey experienced the bulk of attacks, implying that the European Union is still a relatively safe place and civilians in the EU member states are hardly affected (only 40 per cent of the previously stated victims were civilians; cf. Global Terrorism Index, 2017).


It has been argued that the economic consequences of terrorism may be substantial, in particular by causing large direct and indirect costs which may range from the loss of human lives and the destruction of assets to reduced economic growth and life satisfaction. This chapter aims at evaluating the relevance of these costs and discussing appropriate strategies for fighting terrorism in the European context. First, we discuss how terrorism may produce economic damage and review some relevant empirical evidence. We argue that the direct costs of terrorism, i.e. the immediate costs from destruction (of human and physical capital), are usually lower than its indirect costs which are mostly a consequence of the reactions to terrorism of individuals (e.g., consumers, tourists, foreign investors) and institutions (e.g., government, agencies, firms) (Krieger, 2013). Typically, rational and risk-averse individuals tend to substitute away from potentially dangerous places and activities. For instance, additional security measures and the closing of tourist attractions add to a lower interest in visiting places where attacks have taken place.(1)


Second, we discuss the policy response to terrorism (counter-terrorism). We argue that the responses to terrorist events are hardly rational; instead, we usually observe a strongly biased reaction which implies an extraordinary “demand for security”. This demand results in transaction costs which further drive up the costs of terrorism. When evaluated in a rational cost-benefit comparison, the extent of counter-terrorism measures are affected ceteris paribus by the actual costs of terrorism. When terrorism appears to be increasingly threatening, the perceived cost of terrorism rises, thereby lowering the relative “price” of measures to fight it. Fear and assumed urgency shift decisions on counter-terrorism measures toward even higher levels of security, as well as to repressive rather than preventive measures. That is, state-of-emergency policies to secure public places and external borders against transnational terrorists very often appear to be the “natural” response to the terrorist threat, rather than introducing programs which ameliorate societal divides potentially underlying “homegrown terrorism”. Accordingly, we evaluate whether such “natural” responses are indeed meaningful in the fight against terrorism and discuss alternatives as well as complementary strategies.


Following this introduction, we first turn to the costs of terrorism from a theoretical perspective in Section 2 and explain which types of costs can be expected after a terrorist attack. In Section 3, we discuss empirical evidence on the costs of terrorism in Europe, and specifically the European Union. Section 4 discusses counter-terrorism policies both in general and with a particular focus on Europe. Section 5 concludes.


2. The Costs of Terrorism: Theory


2.1 Economic Destabilization as a Goal of Terrorism

Following the widely used definition by Enders, Sandler and Gaibulloev (2011: 321), terrorism can be seen as the “premeditated use or threat to use violence by individuals or subnational groups against non-combatants in order to obtain a political or social objective through the intimidation of a large audience beyond that of the immediate victims.” Broadly speaking, terrorism is a (short-run) tactic to achieve certain long-run political or social goals (e.g., for a left-wing terrorist group the redistribution of wealth and power or for a nationalist group gaining independence) which cannot be achieved in the regular, i.e. non-violent, political process.


The (in-)effectiveness of terrorism is an outcome of the terrorists’ strategic interaction with their enemies, i.e., governments and security forces. To improve their bargaining position in their strategic “game” with the government, terrorist organizations are expected to incur costs on affected countries. Indeed, Schelling (1991) argues that terrorist actions are means to achieve—besides media attention as a form of communication with the general public—economic and political destabilization.


Considering the case of economic destabilization, an attacked government ought to weigh the cost of giving in to (at least some of) the terrorists’ demands (i.e., the socio-political goals at stake) against the cost of a prolonged terrorist campaign that results from continued resistance by the government (Sandler and Enders 2008). When terrorists are successful at destabilizing an economy, the (opportunity2 ) costs of continued resistance increase, so that accommodating terrorists’ demands becomes comparatively less costly (i.e., more likely) from the government’s perspective.


2.2 Five Categories of Economic Costs

Terrorism may harm the economy directly and indirectly, where the latter is associated with the reaction of economic agents (e.g., consumers, foreign investors, governments) to terrorism. In detail, there are several transmission channels through which terrorism affects the economy, most prominently: destruction, disruption, diversion, dissaving and portfolio substitution.


First, destruction refers to the direct costs of terrorism. Through terrorism, human and physical capital are destroyed. Important models of economic growth, such as the Swan-Solow model (Solow 1956 Swan 1956), show that an economy’s output is a direct consequence of its capital stock; a larger capital stock allows an economy to produce more output. Consequently, when terrorism destroys this capital stock (e.g., by killing individuals that “carry” human capital or destroying buildings or infrastructure), economic output is expected to shrink.


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Suggested Citation:

Krieger, Tim and Meierrieks, Daniel, The Economic Consequences of Terrorism for the European Union (January 14, 2019). Discussion Paper Series, Wilfried Guth Endowed Chair for Constitutional Political Economy and Competition Policy, University of Freiburg, No. 2019-02 . Available at SSRN: https://ssrn.com/abstract=3315400

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