In the Basque region of Spain, a decades-long campaign of political terror beginning in the 1970s reduced per capita economic output by 10 percent and continues to have an effect, according to Harvard economist Alberto Abadie.

"The effect of terrorism on the economy dies very slowly with time," he said in an interview. "It's something you have to take into account when you are dealing with long campaigns of terrorism."

In a forthcoming study, Abadie and a Spanish colleague find that even without a steady campaign of attacks, even a perceived risk of terrorism can have a “substantial” effect by reducing foreign direct investment. A sharp rise in the risk of terrorism can reduce foreign direct investment by 5 percent, according to the study by Abadie and Javier Gardeazabal of the University of the Basque Country.

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In a global economy that is more open than ever, the authors argue, some investors will choose to redeploy their funds into countries where they believe the risk of terrorism is lower.

“Even if the terrorism attack isn’t realized, the perception that one may occur may be having an anticipated impact on the economy," Abadie said.

Abadie’s study has some weaknesses. Its calculations are based largely on a global terrorism risk index that was published once in 2003 and never updated. The authors measure foreign direct investment in 110 countries and control for a number of factors, finding correlations with national wealth, demographic factors and openness to investment as well as terrorist risk.

But while it may be hard to quantify with precision, the new reality of a persistent terrorist threat in some of the world’s richest nations clearly has an impact. Just look at the high price of oil, for example, which is being pushed up by a risk premium stemming in part from terrorist attacks that are threatening the Saudi regime and preventing expected oil flows from Iraq.

While the U.S. economy recovered quickly from the 9/11 attacks, that was due partly to a massive government response in terms of fiscal and monetary stimulus, creating economic imbalances that still need to be addressed, said Roubini of NYU, who served on President Clinton’s Council of Economic Advisers.

Roubini said this week's attack in London is likely to have an impact on consumer confidence and possibly on business confidence. Potentially more damaging is the evidence that al-Qaida is operating with confidence in Europe and may be planning attacks against other countries, especially those allied with the United States in Iraq.

“That may have a negative effect on business and consumer confidence,” he said. “I don’t want to exaggerate those effects, but we don’t know.”

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