The Euro area is one of the hardest-hit economies in the world from the COVID-19 pandemic. It went through a complete lockdown in the spring in countries like Spain and Italy, and now restrictions affect economic output again.
Germany, France, Italy, Spain, Belgium – literally all economies with the exception of Nordic countries – are affected by the new restrictions to fight the second wave of COVID-19 infections. Why are the Nordic countries exceptions? The only explanation comes from the difference in cultural aspects when compared to the rest of the European countries.
Short-Term Economic Outlook Deteriorating Rapidly
The summer brought some optimism regarding future economic output. Aggregate demand and supply started to pick up, helped by the fiscal and monetary stimulus. However, the recent weeks brought a very quick deterioration of the economic outlook. Countries like Spain, for example, already deviated almost 10% from the pre-crisis level. Other economies suffered as well – Portugal -6.3%, Italy -4.5%, France -4.1%, are only a few examples.
The enthusiasm generated by this week’s announcement of a promising COVID-19 vaccine should be treated as such – just an announcement. In the meantime, airports continue to be empty, despite their share price enjoying a bounce on stock exchanges. Also, the unemployment rate continues to rise. Moreover, the GDP contracts, and the number of deaths related to the virus is on the rise as well. Hence, more needs to be done in the months or year until a vaccine is available.
As we saw in the spring, the key to fight the pandemic is not only to bring the number of infections down – but to keep it down as well. Cold weather doesn’t help either.
Should Spain and Italy not manage to bring the number of infections down, we may see general lockdowns just like France recently imposed. In that case, the already dramatic -7.7% GDP contraction estimated for the Euro area in 2020 will be further revised lower.
The costs are simply sky-high. For instance, it is estimated that one single day of total lockdown will generate a €80 billion cost for the Italian economy.
All these put pressure on the ECB at the December meeting. Many options are on the table – from further cutting the deposit facility rate deeper into negative territory to increasing the quantitative easing.
However, in the end, everyone assumes the ECB will keep doing what it needs to be done. It may be that the ECB decisions in December, regardless of size, have little impact on the immediate economic recovery.