As an economist, it's always tough to know what it's appropriate to write about following human tragedies. The mindless murders in Paris last weekend are no exception. To date, acts of terrorism, horrific as they may be, haven't normally left permanent macro scars on the economy. But in this respect, most of the world has been largely fortunate. In extremis and if it becomes persistent, terrorism can undermine or wreck economic institutions and become part of a broader conflict or even war, e.g. Northern Ireland during the "troubles," Lebanon, and Colombia's experience with the FARC. At the very least, even if the macro consequences are fleeting, they can certainly raise the costs of transactions and business, e.g. security, transportation and distribution, and insurance.
How then should we start to try and think about the longer-term economic effects of the Paris attacks on the EU, not least since experts tell us that we must remain on a high state of alert for more incidents?
Take a step back. Before the attacks, it was fair to argue that the biggest threat to the EU was what we call in the trade the "tail risk" of disintegration. Tail risk basically means a relatively low probability outcome that has catastrophic consequences. The risk of disintegration is certainly bigger than it was earlier this year.
Greece may still be flirting with exit from the Eurozone; Portugal's new anti-austerity government might break with Brussels over its economic programmes; and Spain's Catalan independence campaign and forthcoming national elections may stir things up. Yet these may all prove more manageable than the consequences of two major shocks to the system—the UK referendum on EU membership, and immigration. The UK electorate may well end up voting for the devil they know, but judgement now is on a knife-edge. If the vote went the other way, it would fracture the EU, and might serve as a green light for others with weak commitments to it.
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The immigration crisis, though, was the most immediate and durable threat to the integrity of the EU before the Paris attacks, and has just gotten a lot more serious because of the possible effects on the Schengen agreement, which is a bit like a load-bearing wall of the EU edifice. Roughly 1m migrants will arrive in the EU this year with potentially many more to come. Some member states have erected razor-wire and other fences to prevent the movement of migrants. Agreement about the sharing of accommodating migrants among member states has been weak or resisted. Now there are allegations that at least one of the Paris terrorists may have entered the EU as a migrant via Greece. So, is Schengen becoming the EU's most dangerous fault-line?
This agreement, dating back to 1985, provides for the free movement of people across borders. No controls, and no passports. It has been implemented by 22 EU countries, though not the UK and Ireland, plus non-member states of Norway, Iceland, Liechtenstein and Switzerland. Newly acceded EU members, Romania, Bulgaria, Cyprus and Croatia, are not yet part of Schengen. It is widely acknowledged that Schengen has contributed to an array of economic and social benefits, including ease of travel and commerce, greater access of workers to firms and vice versa, larger markets, economies of scale, and perhaps above all, a boost to the volume of trade.
Under pressure from the immigration crisis anyway, but now exacerbated by internal and external security concerns in the aftermath of the Paris attacks, it is quite possible that Schengen could be compromised. If border and passport controls returned for more than a brief period and on a big enough scale, travel disruption and delay would become commonplace but this might be the least of our problems. Commercial transportation across borders would be disrupted, affecting the delivery of parcels and packages. Food supplies for supermarkets would be affected. Increasingly important cross-border shipments of goods and services related to on-line businesses would suffer. In a nutshell, all the things we think Schengen helped deliver would go into reverse.
It may well not be black and white.There are provisions for EU countries to suspend Schengen briefly for reasons of national security. Portugal did so during the Euro 2004 football championships, and France did so after the London terrorist attacks in 2005. There have been other rumblings that came to nothing. Italy and France asked for a review in 2011 in the wake of North African migrant arrivals, and earlier this year, during a heated part of the Greek crisis, the Dutch Prime Minister threatened Greece with expulsion if the latter allowed migrants free passage.
This time, things may be different. The security aspects of what just happened in France will not be paid short shrift, and rightly so. Internal security is one thing, and may raise business costs and increase prices and inconveniences for citizens. External security is quite another in as much as the re-introduction of border controls and checks also imposes costs and inconveniences on other member states that would reverberate throughout the EU.
In the cold light of day, we have to hope and I think that the things that make Europeans stick together outweigh the things that divide them. Specifically, in the current context, hopefully the essential and shared concerns about security can find a satisfactory form, even if it does lead to some inconveniences, additional costs—including fiscal, by the way—and partial Schengen restrictions. For example, the intellectually appealing but wholly unrealistic idea of open borders for all under all circumstances and in any quantities has surely crumbled.
But rather an agreed fall-back position pro tem in the light of circumstances, than the alternative in which an atmosphere of "sauve qui peut" ends up fracturing the free movement of labour, and then much else besides.
