Paris attack dents already weaker Euro

November 18, 2015 10:46

On November 13, 2015 a series of coordinated terrorist attacks left ineradicable marks on the capital city of France. Responding to the attacks on its capital, France launched airstrikes on Sunday against Syria. These tragic events have of course affected financial markets.

French economy, the second largest economy in the Euro-zone, contributed more than 21% of the region's GDP during 2014 (as per Eurostat figures). The latest statistics indicated that the French economy returned to growth during the third-quarter of 2015 after grinding to a halt in the previous quarter. The GDP recorded 0.3% growth during Q3 2015 and was in-line with the French government's expectations that the economy is on track to record the strongest year of growth since 2012.

However, tourism is a key driver of the French economy as it contributes near 9% of GDP and provides 10% of total employment. France has been the world's most popular global tourist destination that welcomes nearly 84 million visitors a year. (Source: UNWTO and WTTC). The horrific attacks are likely to have a negative impact on the travel and tourism sector of country.

Other immediate economic effects would be in terms of the psychological impact of the attacks, which could possibly harm the French consumer confidence that unexpectedly dipped in October to 96.00 from almost eight year highs of 97.00 recorded in the previous month. Moreover, such pessimism may lead to a decline in surging consumer spending, that rose 0.3% during the month of october, as people tend to postpone their purchases.

Hence, such attacks on the heart of it might have negative ramifications on the forecast for future growth of the country's economy.

Shaken by the attacks, European currency (EUR) weakened as investors rushed to the perceived safe-haven currencies, the US Dollar (USD) and Japanese Yen (JPY). Although the EUR continues to weaken, the decline, however, does not correspond with market panics and is led on expectations that the ECB is likely to announce additional monetary stimulus during its December meeting. The central bank is expected to extend its QE program beyond autumn of 2016 to September 2017 and might also start buying municipal bonds as part of an extension of its €1.1 trillion program of asset purchases.

In summary, there will be long-term economic consequences of the Paris attacks for France's economy, but it is more likely to have a widespread effect on the already fragile Euro-zone economy. The incidence also strengthens the case of additional monetary easing announcement by ECB during its monetary policy meeting on December 3. This coupled with increased optimism that the Federal Reserve might raise interest rates at its December policy meeting, favours continuing weakness for the common currency (EUR) in the medium to long-term.

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