Europe: COVID-19 Crisis, Policy Responses, and some Structural Issues

EUROPE: COVID-19 CRISIS, POLICY RESPONSES AND SOME STRUCTURAL ISSUES

Debora Revoltella Chief Economist European Investment Bank

GIC Webinar, Analyzing Pandemic – Impact on the European Economy, May 14, 2021 1

12/05/2020

Agenda ‣

Covid-19 economic crisis

‣

Policy response in Europe

‣

Structural issues

‣

Conclusions

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Covid-19 & lock-down - the deepest economic crisis since the great depression • From a “China story” to a worldwide pandemic

• By end of April 2020, countries representing 80% of GDP in some form of lockdown

• Economic shock “easier” to identify

• Lockdown and economic arrest (demand and supply shock), trade collapse and questioning on GVC model

• Huge uncertainty:

• Medical (immunization, timing for a vaccine, second round of contagion, timing of the lock-down, etc.)

• Shape of the recovery (effectiveness of policy answers and consequent likelihood/severity of second round effects of the crisis) • Long term structural changes (change in individual preferences, labor market, value chains security, role of the state) 3

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Covid-19 & lockdown: sudden stop of the EU economy EIB Coincident indicator

GDP growth quarterly, EU and Euro-area

Economic Sentiment, Expectations - EU, manufacturing and services, April vs February

•

EU GDP growth as low as -3.5% in Q1 2020 (-14.4% if annualised)

•

From a few sectors, to a widespread effect on the economy

•

Forecasts pointing to -5/-10% GDP growth in 2020 (EC -7.5% in 2020), 6% in 2021) 4

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Covid-19 & lockdown: stabilising signs (?)

Contagion EU

Moving out of lock-downs DE FR IT ES NL BE AT IE FI PT GR SK LU SI LT LV EE CY MT PL SE DK CZ RO HU BG HR

March 1st half 2nd half 5 76 5 81 100 100 2 76 5 71 2 67 5 90 5 67 2 67 2 67 2 67 2 71 5 76 3 86 5 67 5 43 5 57 4 67 1 67 2 81 5 43 5 81 2 71 5 90 4 95 3 95 3 95

April 1st half 2nd half 76 71 81 81 100 100 76 76 76 76 81 81 90 76 67 67 67 67 67 67 67 67 71 57 76 67 86 81 67 67 43 43 57 57 68 67 67 67 81 71 43 43 81 71 71 67 90 90 95 95 95 90 95 86

May 1st half 2nd half 62 48 81 60 67 67 62 62 71 66 76 62 67 57 62 62 67 52 67 52 60 55 43 43 67 52 76 76 48 43 43 38 48 43 58 55 67 62 48 48 52 52 67 62 57 44 86 76 75 63 75 63 76 76

June 1st half 2nd half 43 43 40 30 57 57 62 62 57 57 57 48 48 43 57 48 45 45 45 45 55 45 38 33 48 48 59 55 38 33 38 33 38 33 45 40 52 52 38 33 48 48 57 48 38 33 62 62 67 53 67 53 65 55

Note: Darker red color indicates more strict containment measures. Scores are based on the severity of restrictions affecting 1. schools/childcare, 2. restaurants and bars, 3. Non-essential shops and services, 4. public gatherings, 5.

Internal mobility, 6. external borders, 7. other areas. Note: Some countries with regional variation on strictness of measures and pace of exit (e.g. FR, DE).

Source: ihs_Markit, ECON.

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V vs U vs L: the importance of the policy response •

V shaped recovery: Canada post financial crisis: shock and rebound

•

U shaped recovery: Spain after the financial and sovereign crisis, with some prolonged setback, due to crisis consequences, but ultimately recovery

•

L shaped recovery: Greece following the crisis, with long term structural adjustment

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Financial sector stronger than in 2008-2009, but not immune to a protracted crisis European banks core tier 1 ratio

% risk weighted assets 25.0

20.0

15.0

10.0

5.0

0.0

2019

2008

Source: IMF and ECON calculations

Approved measures: • Flexible use of existing capital buffers • Limiting pro-cyclical assumptions in loan loss provisioning • Dividend and shares buy-back freezes • LTRO and TLTRO supporting funding • Credit guarantees by various EU member states • Collateral requirements ECB

Possible risks: • Credit risk, in case of protracted recession • Sovereign - Banks nexus

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Corporates – in need for immediate liquidity first, and more stable funding to exit the crisis later

Specific risks: • Large and SMEs • Start-up and scaling up • Security of global value chains

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Labour markets – Covid-19 so far anticipated as a short term shock on the labour market, with short-term work schemes as immediate stabilisers Crises impact on growth

10

Differences in labour market insecurity across EU

In percent, EU27

5

Average expected monetary loss associated with becoming and staying unemployed, as a share of previous earnings

0

25

GDP impact - FC (start 2008)

-5 -10 0

shock + 1

2

3

GDP impact Covid (start 2019) 4 5 6 7

20 2010 or earliest available

2016

15

10

Crises Unemployment impact 12

5

10 8

0

6 4

Unemployment-FC (start 2008)

2

Unemployment impact Covid (start 2019)

0 0

shock +1

2

3

4

5

6

Note: The measure captures aspects of economic insecurity related to the risks of job losses and its economic consequences for workers. It is defined by the risks of unemployment and the income support received in the case of unemployment.

7

Source: Ameco, ECON. 12/05/2020 9

Labour markets - Covid-19 shock stands to hit European labor markets and workers across EU unevenly – need to prepare for the post-crisis market needs Regional impact of Covid-19 shock on unemployment concerns 45

Search interest (index 100=peak popularity)

40 35 30 25 20 15 10 5 0

Lower share

Higher share

Internet use

Lower share

Upper share

Upper education

Lower share

Upper share

HT jobs

Predicted Google search intensity for the unemployment topic for an average region facing 1000 newly identified C19 cases. Lower shares denotes 25th and upper shares denotes 75th percentiles of variable regional distributions. Internet use reflects share of population which use internet on daily basis, upper education corresponds to population share with education level 3 or above, and HT jobs denotes the employment share in science and technology sectors. Based on 306 EU regions, excluding capital regions. Daily observations between January and May 2020, starting from cumulative 100 cases in a country.

Source: OECD (L), and ECON (R).

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Agenda ‣

Covid-19 economic crisis

‣

Policy response in Europe

‣

Structural issues

‣

Conclusions

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Policy response: Member States and EU level

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Policy response: complementarities Member States Measures 35% 30%

Loans / guarantees (not incl in total costs) % of GDP Total costs % of GDP

25% 20%

EU Measures

• SURE: EUR 100 bn, (0.7% of EU GDP) • ESM: EUR 240 bn (2% of EA GDP) • EIB: EUR 200 bn, 1.4% GDP • On top of MFF: increased by EUR 3.5bn to EUR 172bn (1.24% of EU GDP)

15% 10% 5%

Italy Germany Malta Czechia France Croatia Hungary Belgium Denmark Netherlands Cyprus Bulgaria Poland Spain Austria Finland Estonia Latvia Slovenia Sweden Lithuania Greece Portugal Luxembourg Slovakia Romania Ireland

0%

EU measures crucial: - to grant equal playing field in the single market - to internalize spillovers (40% of EIB policy interventions)

Source: His Markit, ECB, local sources and ECON calculations.

Note: Guarantees for Germany for commercial banks, protective shield for companies with far-reaching pledge. Belgium, Netherlands and Cyprus ECB estimates for guarantees. Italy based on ECON estimate.

Slovenia refers to total support; Slovenia and Romania based on local estimate. Packages differ by construction and implementation status.

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Long term risks - sovereigns Debt/GDP ratio in 2020 and Long-term rates Yield on 10 years (average May 1-11)

Sovereign spreads on 10 Years bond

Spread on German bund, Bps (average May 1-11)

4

Spain Italy

3

Portugal Greece

2

1

0

-1

Source: ECB, EC, Bloomberg

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Agenda ‣

Covid-19 economic crisis

‣

Policy response in Europe

‣

Structural issues

‣

Conclusions

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Structural investment needs are large and urgent Risk of wrong incentives, due to low oil prices Environmental sustainability

Covid-19 more impacting low qualified workers

Digital adoption: EU 58% vs US 69% VC/GDP: EU 0.05% vs US 0.33%

Social sustainability

EU firms: 13% of the group of new top innovators (vs US 34%)

Competitiveness and productivity

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Agenda ‣

Covid-19 economic crisis

‣

Policy response in Europe

‣

Structural issues

‣

Conclusions

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Conclusions • The deepest economic crisis since the great depression • Uncertainty remains (medical, shape of the recovery and long term changes) • Policy response crucial to avoid second round effects: • Commensurate • European • Tackling long term structural challenges

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