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Business

Could Terror Attacks Slow Europe’s Economic Recovery?

The attacks in Istanbul drove the European markets down. They bounced back Friday morning, but fears linger that further attacks could unsettle investors and interfere with Europe’s economic recovery.

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The future of Europe's markets looks blurry -- it's hard to know if more attacks will unsettle investors.

Shortly after the news started pouring in that two British buildings had been the target of terrorist attacks in Istanbul, stock markets in Europe and across the world experienced a sharp dip on Thursday. The dramatic drop marked the second in just a few days, after the markets faltered similarly in the aftermath of last weekend's bombings of two Istanbul synagogues.

Before the latest round of terror, European markets had rallied over the summer, leading many to hope that an economic recovery was just around the corner. But the events in Istanbul have served as a reminder that al Qaeda is far from defeated, and more attacks on so-called “soft targets,” like the HSBC headquarters in Istanbul, may follow. At the same time, the war in Iraq has dragged on, and the security situation on the ground has continued to deteriorate.

All this has many wondering if further attacks and jittery markets will slow Europe’s economic recovery. Experts are divided, but most paint a generally optimistic picture.

Attacks could slow economic recovery

Almost immediately following the attacks on Thursday, the effects were reflected in the European markets. The Eurotop 300 index of pan European blue chips was down 1.2 percent, the DJ Euro Stoxx 1.5 percent and the Frankfurt DAX 1.7 percent. On Monday, following the attack on two synagogues over the weekend, the Frankfurt DAX suffered an even more extreme drop-off, tumbling 3.2 percent. By Friday morning, all markets had partially recovered.

Among the many other factors investors now take into consideration, “geo-political” developments -- as experts kindly term terrorist activities as well as political turbulence resulting from, say, a EU-U.S. trade war -- are now considered among the most important. But a debate persists over whether or not such developments, particularly of the terrorist variety, will spell trouble for Europe’s economic recovery.

“Should we see a decline in confidence because of geo-political developments, that could be a problem for the economy,” Lorenzo Condogno, an economist at the Bank of America in London told DW-WORLD. “That could actually undermine or slow down the economic recovery in Europe.

Most analysts stress the big picture

Others, however, downplay the temporary panic sparked by the attacks and emphasize the big picture, stressing that as long as other news -- earnings reports and consumer confidence reports, for example -- continues to be good, the recovery will remain on track.

“These events will definitely have a temporary negative sentiment on equities and may even call into question the end of the year rally,” Hendrick Garz, a European equity strategist at WestLB Panmure in Düsseldorf told Reuters. “But I have no doubt that we will see further equity gains if the economic news-flow continues to be positive next week,” he added. “Investors will definitely have these [security] topics in mind, but we are still far away from the point where they would really see this as an obstacle to investment.”

Garz is not the only expert to hold this opinion. “At the sort of level we are seeing, I don’t think it is going to disrupt the progression of the recovery -- the fundamentals are very supportive,” Mike Lenhoff, a chief strategist at Brewin Dolphin Securities told Reuters.

Historically speaking, markets have always been sensitive to geo-political events. U.S. markets dropped 2.93 percent after the Japanese attacked Pearl Harbor and 2.89 percent after John F. Kennedy's assassination. In Europe, the various markets dropped between 5 and 10 percent following the attacks on September 11.