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The Hidden Costs of Terrorism

Although it may seem inappropriate to focus on the cost of terrorism after the tragic attacks in Paris, policymakers and investors must struggle to determine the extent of the economic losses...
November 18, 2015

Although it may seem inappropriate to focus on the cost of terrorism after the tragic attacks in Paris, policymakers and investors must struggle to determine the extent of the economic losses. Experts say that in general the economic damage from acts of terrorism is insignificant, and economists often cite studies of the 2004 Madrid train bombings and the 2005 subway bombings in London showing that the effect of these attacks on the gross domestic products of the two nations was minimal. Even after the September 11 attacks, consumption in the United States was essentially unchanged, although there was some decline in investing.

Je Suis Paris

On November 16, investors prepared themselves for a sharp decline in the markets, but indexes in the United States rose more than 1 percent and the markets in Europe were essentially unchanged. However, this stability in the markets may lead to an underestimation of the actual cost of terrorism in general and of the Paris attacks in particular.

Citigroup released a report saying that although the November 13 attacks in Paris may not have caused extensive volatility in the market, it stated that financial markets “treat such developments as idiosyncratic and the unfortunate reality of a world where large-scale carnage has become an almost daily, if sickening, development.” But the report warned that the Paris attacks may be different. Citigroup said that it had upgraded the risk of terrorist attacks both in the West as well as the Middle East and now considers it more likely that international military interventions against Islamic State installations in Syria, Iraq and Libya will increase. [analysis by the New York Times]

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