France is at war! – Will Europe Follow?

Hollande_Says_‘France_Is_at_War’By David Nelson, CFA

It was just over a week ago armed terrorists launched a coordinated attack in Paris killing 130 people. This comes on the heels of a suicide attack in Beirut and the downing of a Russian airliner. Just days later, another attack takes place in Mali killing 22. On Saturday, Brussels was under the country’s highest terror alert shutting down Belgium’s Capital. As governments around the world scramble for a solution leaders are coming to the conclusion there will be significant costs both human and financial to successfully fight the growing worldwide jihadist threat.

Already France and the European Commission are at odds as relations turn upside down. France was reluctantly moving further toward free market reforms but is now faced with a growing terror threat forced to move to a war-time economy. All of this came to a head when French President Hollande blasted the EC budget rules saying “The security pact takes precedence over the stability pact. France is at war!”

For France and the EC the only way out of the quagmire is for all parties to bargain in good faith. Like it or not, this is also Europe’s fight. We already know France isn’t the only target. Slowly the world is coming to grips with the fact that ISIS is not contained and will likely need a global response. It will take money, manpower and the political resolve to win.

Prior to the attacks the European Commission was concerned that France would not get its budget deficit to 3% of GDP by 2017. Given recent events and President Holland’s comments that seems likely. It’s important to note that under the rules debt is supposed to be no more than 60% of GDP along with a deficit less than 3% of GDP.

The rising cost begs the question can Europe afford to help? The better question is can they afford not to? Budgets are stretched but during a time of war you bend the rules. Fighting a terrorist organization like ISIS has a human as well as a financial cost but there’s also a cost to doing nothing or not enough. For Europe, it will likely mean a relaxation of European Commission rules.

The Changing Face of Europe

The face of Europe has been changing for decades. According to the Pew Research center a think tank out of Washington more than 7% of France’s population is Muslim and Germany is close to 6%. That’s more than 9 Million and growing. Next on the list are the United Kingdom, Italy and Bulgaria adding another 6 million and that’s data from 2010. Today’s numbers are likely higher. The Wall Street Journal points out that ISIS is shifting tactics deploying trusted lieutenants to engineer larger, more coordinated plots against the West. Add a small radical group hiding within the population and you’ve got a problem.

I don’t think France has anywhere to turn for money but certainly Europe and the U.S need to take a leadership role. This is a global problem that needs a global solution. It’s an opportunity for the world to work together. The U.S., Europe, Russia, China and the Middle East all have a stake in the outcome.

Should NATO Invoke Article 5?

Many are asking if NATO should have invoked Article 5An armed attack against one or more of them in Europe or North America shall be considered an attack against them all…”

The Tipping Point

If the operational tempo of a terrorist group like ISIS picks up consumers will change their behavior creating a trickle-down effect damaging the economy. When fans stop going to the stadium or the public slows down trips to the movies or the mall, one by one it adds up eventually pushing the economy to the tipping point.

The military costs are obvious but homeland security and local law enforcement will need increased funds as well. Today, New York City has a fully functional Counter Terrorism unit.

So far, markets have shrugged off the most recent attacks. Here in the U.S. the S&P 500 sits less than 2% from an all-time high. Investors seem more concerned with the pace of Fed rate hikes or just how much stock their favorite company is going to buy back. For now, Raqqa and even Paris seem far away. However, I suspect an attack on our soil will usher in a whole new conversation.