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George Magnus

Insights into the global economy

Paris attacks: what would happen if Schengen crumbled?

A compromise on freedom of movement rules is now the EU's greatest economic risk

by George Magnus / November 16, 2015 / Leave a comment
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Merkel and her fellow EU leaders are under pressure to save Schengen. © Sean Gallup/Getty Images

Merkel and her fellow EU leaders are under pressure to save Schengen. © Sean Gallup/Getty Images

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 forthcom…

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Comments

  1. Borje W.
    November 16, 2015 at 20:14
    Both Schengen and the EURO were good ideas that became jerrybuildings. The only way to save the EU is to aknowledge this and to the proper thing; go back and try to do it properly next time. Börje Widerberg

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About this author

George Magnus
George Magnus is a well known economist and former Chief Economist at UBS. His forthcoming book is "Red Flags: Why Xi's China Is in Jeopardy" (Yale University Press)
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