HomeThe Economic Impact of New Lockdowns in Europe

The Economic Impact of New Lockdowns in Europe

4 November 2020 By Mircea Vasiu

The European economies face one of their toughest times since the common project began. Not even in the aftermath of the 2008-2009 Great Financial Crisis or during the 2012 European sovereign debt crisis did the economic perspective deteriorate so much as it did in the last month.

After the first wave of the pandemic was behind, many international organizations (e.g., International Monetary Fund) projected a gradual recovery in 2020. Moving forward, 2021 was projected to recover some, if not all, of the lost economic growth.

None of the papers forecasted a second lockdown. As it turns out, the second wave of the pandemic hit Europe at its worst time – uncertainty is much higher than it was in the first wave.

What Is New in the Second Wave of the Pandemic?

Pretty much everything. To start with, the initial assumption in the spring was that if the European countries manage to bring down the number of infections (and deaths), somehow, they will manage to keep it low moving forward.

The arguments were that the medical staff will learn more about the disease, how to treat it, what works best, and so on. Winter seemed so far away, and most countries bet that they will be better prepared to handle a (possible) second wave. Indeed, they are better prepared – medical infrastructure improved, supplies built up, money exists. However, as the virus spreads quickly and much more aggressively, uncertainty builds regarding the ability to keep the number of infections down.

Naturally, businesses are reluctant to spend in such an environment. Firms spending behavior changes, investment is postponed, output declines, as well as aggregate demand. Put it simply – GDP contraction, deeper economic recession than initially thought.

Some investment banks already revised the economic outlook for Europe. JP Morgan is the first one to do so, revising the growth from positive to negative 2%. All in all, a 4% slash in growth, and this is just the beginning.

The ECB will have to do some more, and it will do. The market expects that the December meeting is the one that brings more easing. However, fiscal support is needed too. Debt will rise, and voices will rise against spending and stimulus. Yet, the European economy is at risk of losing its competitiveness as private businesses are at risk.

Asia weathered the pandemic much better. Australia just released a warning by further easing and delivering more economic stimulus this week. The warning is that it does so while controlling the virus’ spread much better than Europe does at the moment or did in the past.

Tough times ahead for the European countries. Desperate times require desperate measures, and increased spending is the only solution ahead to avoid bankruptcies on a large scale.