us that pandemic concerns will dwarf most of the other policy issues until a vaccine is widely distributed, which won’t be until well into 2021. Policy measures were designed in emergency situations, but second lockdowns around Europe illustrate that a series of waves cannot be ruled out. Because the side-effects of the lockdown measures might be expected to intensify as the crisis becomes more protracted, there is good reason to revisit policy measures to fine-tune the balance between short-term support and longer-term programmes. In addition to shoring up short-term demand, the policy package can become truly instrumental in ensuring the success of the three pillars of the recovery: resilience – greening – digitalisation.
Introduction
In 2019, the European economy was gradually slowing down after six years of relatively weak expansion. The slowdown could be traced back to more sluggish international trade resulting from tensions between the United States and some of its main trading partners. Just as the export-oriented engines of European growth were running out of steam, the coronavirus pandemic broke out. The virus spread quickly around the globe, forcing governments to take sweeping measures in an attempt to arrest it. The associated restrictions brought whole swathes of the EU economy to a near complete standstill with severe implications for consumer spending, investment and overall economic activity. The ECB deployed a major policy package in response, and this time, domestic fiscal policies and European policy also joined forces to safeguard the European ecosystem during the lockdowns imposed in the various countries.
This chapter sets the stage for the analysis provided throughout this report by giving an overview of the economic situation at the outbreak of the pandemic. The first section outlines the macroeconomic environment in Europe and the world in the first half of 2020, focusing on the link between EU economies, global growth and international trade. The second section details the latest developments in real GDP growth and labour markets in the European Union. Four boxes provide further detail. Box A quantifies the likely effects on GDP of the re-introduction of government restrictions in the fourth quarter of 2020. Box B frames the economic shock due to the pandemic in a historical perspective. Box C outlines the challenges to European social protection systems posed by the pandemic. Box D discusses the use of short-term working schemes in the European Union during the crisis. The third section focuses on financial developments and the fiscal and monetary policy response to the considerable economic shock. Box E in this section outlines EU banks’ credit exposure and policy responses. The chapter ends with concluding remarks and policy implications.
The cross border environment in Europe and the world
The COVID-19 crisis erupted in the beginning of 2020, when the world economy was already slowing as uncertainties and geopolitical and trade tensions mounted. The pandemic was, by its very nature, unexpected. The virus emerged in China and quickly spread to the rest of the world. It propagated quickly within Europe as a result of the closer integration of economies through trade and personal travel. This section explores the cross-border dimension of the crisis, focusing on the European economy and stressing the need to protect the long-term integrity of the single market.
Using lockdowns to flatten the curve
COVID-19 is a genuinely global shock to the world’s economy. By its very nature, the original pandemic shock was unrelated to the structure of the world’s economies. Its origin was independent from economic policies, but the policies put in place to limit the virus’s spread had economic implications. Most countries implemented lockdowns and restricted the free movement of people within national territories and across borders. Infection waves were not fully synchronised across continents, but they tended to be relatively closely aligned within Europe, with its highly integrated landscape.
The first wave hit Europe towards the end of the first quarter of 2020 and the second wave in the beginning of the fourth quarter. Figure 1 shows the trend in COVID-related deaths in the world’s major economies. In the second wave, the rise in the death rate seemed to be less acute as countries are better prepared thanks to the lessons learned from the first wave. However, the implementation of a second lockdown in most European countries serves as a reminder that the situation will remain problematic until a vaccine is distributed to a large share of the population.
Imposing lockdowns has, so far, been the policy option to curbing the increase in infection rates and avoiding bottlenecks in the health system. The chain of events is as follows. Higher infection numbers help the virus spread. This increases the likelihood of vulnerable people becoming infected, who, more than other people, may require hospitalisation in intensive health care units. Given the limited number of spaces, the system can quickly be stretched to its capacity, driving the fatality rate up substantially. To avoid this, lockdown policies, with varying degrees of strictness, have been implemented across the world to flatten the curve. As shown in Figure 2, these policies drastically limit freedom of movement and require some shops and public places to be closed.
Figure 1
Fatality rates (COVID-19 deaths per 100 000 inhabitants)
Source: European Centre for Disease Prevention and Control (ECDC) and EIB calculations.
Note: Last record 3 November 2020.
Figure 2
Google mobility indicators (EU average)
Source: Google Community Mobility Reports and EIB calculations.
Note: Last record 2019. GDP weighted. The reports chart movement trends over time by geography, across different categories of places. Mobility is compiled in deviation from a baseline day, defined as the median value from the five week period 3 January – 6 February 2020.
Lockdown policies took a toll on economic activity, and in 2020 global trade and world GDP collapsed. It is not only Europe, but the entire world economy that has been hugely affected. In its October 2020 World Economic Outlook, the IMF forecasts that global real GDP will contract by 4.4% in 2020, and rebound in 2021 (Figure 3). Emerging market economies are facing an extremely challenging situation, with GDP declining in 2020 for the first time since the early 1990s, if not earlier. This is in stark contrast with the global financial crisis. In addition to the toll on public health, emerging economies have had to deal with the losses in domestic activity caused by containment measures, plummeting foreign demand, collapsing commodity prices and disappearing capital flows.
Prior to the second wave, a relatively swift rebound in worldwide economic activity was still expected. The IMF October 2020 World Economic Outlook was prepared and issued well before the second wave of infection and lockdown in Europe, and pointed towards a relatively swift rebound in the world economy. However, the arrival of the second wave means that it will take longer for economies to begin fully functioning again, which is
