The financial cost of terrorism in Europe

Jun 7, 2018

Brought to you in collaboration with the RAND Corporation.

A woman leaves flowers near the scene of the attack at London Bridge and Borough Market in central London, Britain June 7, 2017. REUTERS/Stefan Wermuth - RC1CCDF36230

Beyond its human toll, terrorism has profound economic effects. Image: REUTERS/Stefan Wermuth

This article is part of the World Economic Forum's Geostrategy platform

Besides the loss-of-life and sometimes life-changing injuries for the victims, terrorism leads to significant economic effects, with businesses, cities and nations losing billions in the aftermath of attacks.

Calculations show that terrorism has a large negative association with economic growth in Europe. Between 2004 and 2016, the 28 EU member states lost around €180 billion in GDP terms due to terrorist attacks.

The threat posed by terrorism in Europe is one which feels very real to EU citizens and residents.

Since 2004, attacks in Madrid, London, Paris, Brussels, Nice and Berlin and other European cities mean that the phenomenon is at the forefront of the minds of citizens and policymakers alike.

Assessments by intelligence and law enforcement authorities in many EU member states indicate that a terrorist attack is highly likely or expected immediately. Therefore, national governments, politicians and policymakers are constantly looking at responses to these increased threats.

Besides the obvious emotional trauma caused by terrorist attacks due to the injuries and deaths to civilians, there are a range of other impacts that occur, from EU states' economic losses to the pronounced psychological effects on EU citizens who witness these attacks. Despite the infrequent nature of terrorist attacks, the range of impacts on EU citizens remains significant.

The RAND Europe study, commissioned by the European Parliament, explored the costs inflicted by terrorism within the EU between 2004 and 2016. This covered the following areas:

1. The impact of terrorism on the GDP growth per capita across each EU member state;

2. The human and physical costs of terrorism, which focused on the costs of homicides, injuries and property damage following a terrorist attack; and

3. The wider psychological effects of terrorism, such as life satisfaction, happiness and trust among populations of EU member states.

The study used econometric modelling techniques to quantify the impact of terrorism on the economy by looking at the effect on GDP growth per capita during the 12-year period between 2004 and 2016.

The human cost of terrorism was calculated using the Institute for Economics and Peace's cost-of-violence methodology, which includes lost life-time earnings and cost of medical treatments from incidents of terrorism.

The wider psychological effects of terrorism were explored through investigating the associations between terrorism activity within a country and the average levels of self-reported life satisfaction, happiness and trust among the populations of the EU member states.

Findings

Terrorism is negatively associated with economic growth in Europe. The 28 EU member states have lost around €180 billion in GDP terms due to terrorism between 2004 and 2016.

The UK (€43.7 billion) and France (€43 billion) were the nations that suffered the highest economic losses in GDP terms due to terrorism. This was closely followed by Spain (€40.8 billion) and then Germany (around €19.2 billion).

The extensive coverage of terrorist attacks through the multiple media and social media channels has led to an exponential growth of eyewitnesses of terror attacks. This means that even those not directly involved in attacks may be psychologically affected.

The psychological impacts of witnessing terror attacks can lead to people and companies changing their behaviours, which has a direct impact on the economies of EU nations. For example, EU citizens are likely to consume more and save less, with this leading to an increase in consumption; however, there is also likely to be a decrease in savings and investment rates by companies.

Despite the economic losses in GDP terms, consumer purchasing habits remained relatively stable across the EU and sometimes even increased in the aftermath of a terrorist attack. There is also no significant change in the share of government expenditure from EU member states relative to their GDP in light of terrorism.

The negative effects on EU economic growth following terrorism tend to be short-lived and only apply within the year of the terrorist incident. For example, the tourism sector, despite taking a significant economic hit initially, seems to return to normal within one to three months following a terrorist attack.

The human and physical capital costs of terrorism in the EU were estimated to be an additional €5.6 billion between 2004 and 2016. These include the costs of homicides through lost life-time earnings, injuries through medical treatment costs and property damage costs.

More terrorist attacks are associated with lower levels of life satisfaction and happiness among the EU population. Terrorist attacks also lower EU citizens' trust in fellow citizens, national political institutions, the legal system and the police.

The cost estimates presented in the report are likely to be an underestimation of the overall costs of terrorism, as some factors have not been quantified due to a lack of data. Moreover, the study has not included a number of recent terrorist attacks in late 2016 and 2017 due to the lack of evidence on costs at this moment in time.

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Recommendations

The majority of the policy recommendations outlined in the report suggested stepping-up the use of existing measures and powers, or ensuring full implementation of changes and measures already proposed, and in some cases underway. These include:

Introducing new standing mechanisms to review the implementation of counterterrorism policy in the EU;

Enhancing existing support for research and strengthen monitoring in the field of countering radicalisation;

Building greater EU-wide coordination and knowledge sharing on the most effective counter terrorism and radicalisation initiatives;

Building greater information sharing across different EU member states and with Europol and Eurojust;

Adopting and implementing existing EU legislation on money laundering to deal more effectively with terrorism financing; and

Reviewing the effectiveness of the EU-US Terrorist Finance Tracking Programme with a view to informing a decision about the potential creation of an EU Terrorist Finance Tracking System.

However, the report notes that some of these policy recommendations could have implications for human rights legislation and data protection across the EU.

The cost of terrorism in Europe, RAND Corporation

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