BAD WEATHER, trade war, changes in car emission tests and low water levels in the Rhine: since 2017, the European economy has been hit by a number of shocks, none of which could control the unfortunate ministers of Finance or central bankers. Last year, the eurozone GDP only increased by 1.2%. Germany and Italy, which, as major manufacturers, were the most exposed to the US trade war with China, plunged to the bottom of the area’s growth rankings.
Now covid-19 is spreading across the continent. More than 3,000 cases have been confirmed in Italy, and more than 200 each in France and Germany. The response to the epidemic rests with the health authorities. But the virus is also a major blow to the economy.
The economic problems started before the virus even reached Europe. China is generally a large buyer of European cars and other manufactured goods, swallowing up 7% of German exports. Figures for February are not yet available, but it seems certain that sales will have declined with the epidemic in China.
The disruptions will also have had repercussions on manufacturers’ supply chains, many of which depend on parts from China, and have hurt countries like Germany. According to a survey of purchasing managers in the eurozone, published on March 2, delivery times for manufacturing parts increased “significantly” in February, with respondents blaming delays on coronavirus-related shutdowns in China.
Added to all of this is the economic impact of the virus epidemic in northern Italy. The most productive regions of the country, Lombardy and Veneto, were the most severely affected. Together, they represent almost a third of production. On March 4, the government ordered the closure of schools and universities across the country until March 15. Such containment measures could force more people to stay at home, which would further decrease economic activity.
All in all, another bad year for Italy and Germany seems likely (see graph). Goldman Sachs analysts predict the two will fall into recession in the first half; the euro area as a whole is expected to be tightly bypassed. Forecasters anticipate a sharp rebound in the second half. But precisely when it occurs will depend on the extent to which the virus spreads and the measures taken to contain it. French authorities, for example, have banned large-scale indoor events. Some tourist attractions, such as the Louvre, have closed. This will slow the spread of the virus. But it will also cause a drop in output: depending OECD, tourism represents 7% of France GDP, and around 12% in Portugal and Spain.
Policy makers are expected to help the most troubled businesses. On March 2, Christine Lagarde, Director of the European Central Bank (ECB), promised to take “appropriate and targeted” measures to deal with the economic effects of the virus. Investors are waiting ECB to lower interest rates in the coming months, like the US Federal Reserve, which unexpectedly lowered rates on March 3. But with the ECBThe rate already at -0.5%, it has little room to cut further. Some economists expect it to modify its low-cost bank lending program at its March 12 meeting, perhaps to encourage lenders to continue lending to the firms most affected by the spread of the virus.
So far, governments have shown varying degrees of enthusiasm for loosening the purse strings. Italy has pledged to spend € 3.6 billion ($ 4 billion) on health care and tax cuts to help the most troubled businesses. Given the unusual circumstances, he has an exemption from the European Commission to spend more than the EUBudget rules would allow in normal times. French Finance Minister Bruno Le Maire calls for more spending to cushion the blow to the economy. In contrast, the traditionally tight German government has so far done little.
This could change quickly if the virus spreads further. Deutsche Bank analysts predict the eurozone GDP growth could fall at an annualized rate of 4% in the second quarter in the event of a more serious epidemic, and even more so in Germany. The prospect of job losses and bankruptcy may soon push governments to do much more. ■
This article appeared in the Europe section of the print edition under the title “A series of unfortunate events”