Jury still out on whether terror attacks will deal blow to economic confidence
As Paris continues to struggle with the aftermath of the recent tragedy, many European countries remain on high alert due to threats of terror attacks. Most recently, we have witnessed the unprecedented 'lockdown' of Brussels.
After the initial reaction, markets have settled and the impact has been limited. Last week the main equity markets rallied and there was a reduction in volatility. Investor sentiment was buoyed up by the positive views on the US economy from the Federal Reserve. The question remains as to whether fear and uncertainty may yet result in lower confidence among European consumers and corporations.
Two themes have begun to emerge. Internationally, we have seen a reasonable level of consensus on the need to deal with the terrorist threat on a unified basis. There is also evidence of a move, in some areas, towards greater isolationism. We have already seen discussions about stricter controls in the Schengen area in Europe and the move by many Republican states in America to curb immigration.
The step towards isolationism and more local control is seen as a positive for those who wish the UK to exit the EU. With recent poll results, the so-called 'Brexit' debate is coming to the fore again, bringing more pressure on David Cameron's position.
Even before recent events, YouGov had 38% of people in its UK survey saying they would vote to stay in the EU, with 40% saying they would vote to leave. This is the first time since November 2014 that the majority of those polled wanted to leave the EU. Although campaigning has not started, at this early stage it really is too close to call.
We are already hearing learned proponents with differing views explain why their particular position is correct, reinforced by analysis and statistics. Mark Carney, the Governor of the Bank of England, has referred to the importance of EU membership to Britain's economic recovery. In contrast, Tim Congdon, a leading economist, claims the true cost of membership is much higher than is generally accepted.
The truth is, nobody really knows, given the level of assumption built into any economic model for the impact of EU membership. What is true is that the decision will be vital. At present, the consensus among business leaders is that staying in the EU is the best option. Whatever their point of view, most commentators acknowledge that some EU reform is needed.
Markets are not comfortable with uncertainty. If the trend of recent polls continues, we are likely to experience increased volatility. In the longer term, however, the markets will be driven by corporate profits, so a consensus will begin to emerge on the economic impact of the UK's relationship with Europe.
In the UK tomorrow, attention will turn to George Osborne's autumn budget statement. It is unlikely to have any significant immediate market impact, but will be important in assessing the direction of travel towards Osborne's aspiration of having a budget surplus.