European state chequebooks to remain closed after Paris attacks

Suggestions that European governments are about to open the security spending floodgates in the wake of the Paris attacks were rubbished on Wednesday.

The attacks in the French capital on Friday left 129 dead, with a number of suspects outstanding and police carrying out hundreds of raids in the days since.

World markets remained largely unaffected by the attacks on Wednesday, with London-based research consultancy Capital Economics not anticipating any serious movements.

But one possibly meaningful consequence, the consultancy suggested in a report, is a “loosening of the fiscal shackles … as governments step up security and defence spending”.

“French president Francois Hollande has announced the creation of an additional 5,000 police and security jobs … (and) Italy’s government has announced the cancellation of planned defence cuts and an extra €120m in spending”, said Jonathan Loynes, chief Europe economist at Capital Economics.

But Loynes didn’t believe the spending on public security would amount to any transformation of fiscal policy.

“We estimate the additional costs (in France) at less than €1bn p.a. by 2017, less than 0.1% of GDP and very small compared to the total €15.4bn of planned spending cuts for that year”, Loynes said.

“Likewise, the additional Italian spending pledges amount to just 0.01% of GDP.”

The Capital Economics report did point to expectations that European fiscal policy will become less restrictive in coming years, with Loynes saying “there is some hope that a more flexible enforcement of budget rules will both help individual countries to protect their citizens and provide the fragile European economy with some much-needed support.”

But it would be wrong to expect the wholesale removal of Europe’s fiscal shackles because of these attacks, Loynes stressed.