before a vaccine is widely distributed. As the crisis may last well into 2021, some emerging economies very dependent on tourism may well suffer two consecutive years of ultra-weak activity.
The pandemic hit some European economies harder than others. It is not fully understood how the virus spreads, but in Europe higher infection rates triggered more stringent lockdowns, which weighed on individual economies. Other factors were also at play, such as the composition of GDP and the share of tourism (Sapir, 2020). The COVID-19 crisis will most likely lead to structural changes in the economy as some sectors decline or remain lacklustre for a long time (including international travel and tourism, or transport services as people turn more to remote working and therefore commute less) while others expand to support new lifestyles (such as telecoms, and, more broadly, digital activities). Given the differences in the composition of European economies, some economies are likely to be more affected than others.
Figure 3
Composition of global growth (% and percentage points)
Source: IMF October 2020 World Economic Outlook (WEO) and EIB calculations.
Note: Projections over 2020-2024. Last record 2024.
Figure 4
Global exports in the world economy (exports over GDP, %)
Source: IMF October 2020 WEO and EIB calculations.
Note: Last record 2020, partially projected.
During the second wave, governments have tried to rebalance the economic costs of lockdown policies. After the first wave, the strategy of limiting the spread of infection by testing and isolating positive cases was stepped up, but so far, this strategy has not sufficed. At the onset of the second wave, bars and restaurants were closed in most of Europe, followed by the introduction of curfews, and then lockdowns.
The longer the crisis, the deeper the scars. Infection waves may continue until a vaccine is widely distributed. Relatively good news was reported in the beginning of December with several vaccines approved for use by medical authorities in various countries. In the best case scenario, however, the mass production and administering of a vaccine will take months, which means the crisis is likely to continue well into 2021. The longer the crisis, the deeper the scars, and the greater the increase in corporate and government borrowing. Meanwhile, as the pandemic wears on, containment policies will inevitably continue to immobilise the economy, while public support will focus on maintaining the ecosystem and limiting capital erosion (Lagarde, 2020).
A protracted drag on external trade?
Prior to the crisis, globalisation was at a standstill. The reasons for the halt in the ascent of globalisation are numerous: fears stemming from the global financial crisis, the trade war between the United States and China, the maturing of the Chinese economy, the limits to manufacturing growth and the stronger development of services, and receding multilateralism. As a result, the GDP-to-external-trade ratio had flattened somewhat since 2008, as shown in Figure 4.
The COVID-19 crisis may further dampen the long-term prospects for external trade. With the crisis, firms have taken on-board the need to increase the resilience of their production chains. They have started rethinking their global value chains, no longer focusing simply on maximising returns but also looking at how they can reduce risks by increasing the strength of their networks. Governments are also likely to take on greater weight in the post-pandemic economy with increased public spending, partly to reinforce healthcare systems (Organisation for Economic Co-operation and Development (OECD), 2020b). Finally, countries may reallocate the production of products deemed strategic to guarantee national independence (medicines and health equipment for instance).
What impact will the pandemic have on globalisation vs. regionalisation? How will the rethinking of resilience vs. cost change global supply chains? Bonadio et al. (2020) estimate that the impact of foreign lockdowns accounted for one-third of the total pandemic-related contraction in global GDP. However, the immediate impact of the crisis on the redefinition of supply chains appears to be limited, as it takes a lot of time and effort to find different suppliers of comparable quality. Car manufacturers, for example, cannot simply move from China to another country with low labour costs and expect to find manufacturers of, say, airbags that can meet the same quality standards quickly.
The COVID-19 crisis, however, will have a permanent impact. It is magnifying the effects of existing mega-trends: the new industrial revolution, growing economic nationalism and the drive for sustainability. The extent of the COVID-19 crisis’s disruption to working practices and behaviour patterns seems substantial. Companies have accelerated the digitalisation of their supply chains and customer channels, and many are moving faster in adopting artificial intelligence and automation. Other changes in the workforce are also afoot.
The pandemic may accelerate longer-term shifts toward shorter and less fragmented value chains (United Nations Conference on Trade and Development (UNCTAD), 2020b). Industry 4.0 is pushing the move towards automation and smart technologies in manufacturing and industrial processes (Baldwin, 2019), along with growing economic nationalism and the need to make human activity more environmentally sustainable and less resource dependent. These trends are set to reduce gross trade in the global value chain, limiting the circulation of intermediate inputs and final products in the medium term. These trends will also lead to further concentration in the value added in certain geographic areas. As another consequence, production will shift from global to regional and sub-regional value chains. Automation and reshoring will see an upswing to increase flexibility and reduce the risks that firms face during a global shock. These trends are driven by considerations related to the resilience and robustness of supply chains, not national protectionism.
Maintaining cross-border transport infrastructure is key to ensuring good conditions for the economic recovery. Much-reduced mobility has put transport infrastructure at risk. The air transport of passengers and goods is a core component of the world’s economy. According to Airport Council International, traffic at Europe’s airports decreased by 73% in September 2020 compared to a year earlier. More than one-quarter of Europe’s airports are at risk of insolvency if passenger traffic does not start to recover by the end of 2020. While these airports are mainly regional, larger airports are affected too. The sudden spike in their debt levels – an additional EUR 16 billion for the top 20 European airports – represents 60% of their average debt in a given year. Internal transport infrastructure is also at risk. According to Eurostat, the number of rail passengers was cut in half in the majority of EU Member States in the second quarter of 2020, compared with the same quarter a year earlier.[1]
Protecting the single market and reducing the spillover of negative effects
European economies are more open than other advanced economies. Export dependence, defined as the share of exports and imports to GDP, is above 66% in Germany and higher than 40% in France (Figure 5). Overall, external trade in goods and services accounts for 27% of euro area GDP, a share that rises to 45% when including trade among EU members. The European economy is therefore highly integrated and maintaining cross-border movement is key to its functioning, more so than elsewhere in the world.
