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Europe must tackle economic fallout from Covid hard and fast


In the first half of 2020, Europe put in place a bold and rapid economic response to the Covid recession. As the second wave of the pandemic triggers a further downturn, policymakers appear to have lost some of their mojo.

Governments are struggling to effectively manage the health crisis as they hesitate between keeping economies open and imposing further restrictions.

The European Central Bank (ECB) is expected to announce a new round of stimulus measures in mid-December, but it is unclear how much it can contribute to the recovery.

The member states of the European Union are at loggerheads as the bloc tries to finalize a multi-year budget including a common recovery fund in the event of a pandemic. While a deal appears to be the most likely outcome, delays will hurt the prospects for a rapid economic rebound.


Fortunately, the second slowdown this year seems less pronounced than the strong contraction in spring. Manufacturing has maintained a decent pace thanks to the resilience of global trade, aided by China.

Even in services, the new foreclosure restrictions have been far less drastic and therefore less damaging.

The eurozone is expected to contract 1.7% in the three months to December, according to a composite forecast from Bloomberg. This is much less than the 11.8 percent drop in the second quarter.

However, it would be wrong to treat these two recessive waves as separate, as their cumulative effect matters a lot. It was bad enough for restaurateurs and traders to shut down during the first restrictions. The second lockdown, while softer, was more brutal in many ways, piling misery on lost first-half income.

As ECB President Christine Lagarde noted this month: “If the public no longer views the pandemic as a one-time event, we might see more lasting behavior changes than in the first wave. ”

It could mean more bankruptcies, more discouraged workers and more long-term damage to the economy.

At least the eurozone had a solid base to deal with the latest closures. In the spring, the European Commission suspended the bloc’s fiscal rules, paving the way for a strong response from governments.

The ECB has launched an extensive bond buying program, which has become more flexible over time.


To top it off, EU leaders have agreed on a grant and loan program that the Commission will finance by borrowing from the financial markets. The lessons of the slow response to the euro area debt crisis over the past decade appear to have been learned.

And yet, the ghosts of failure once again haunt Europe.

Governments in Spain, France, Italy and elsewhere have failed to adequately prepare for the second wave of the virus; health systems and tracking and tracing operations have collapsed under the weight of the number of cases.

Governments desperately wanted to keep businesses open, but in doing so, they failed to contain the humanitarian or economic crisis.

Politicians are preparing a new round of reopening to “save Christmas” (and retailers), but hospitals are already operating near capacity. There is the risk of a third wave in January, just before the expected widespread deployment of Covid vaccines.

The ECB is doing its part. Bond yields are at record highs; The 10-year public debt of Spain and Portugal could soon join the less-than-zero club. Lagarde is ready to complete the ECB’s € 1.35 trillion asset purchase program and offer more generous cheap loans to banks to ensure they continue to lend to the real economy .


However, there are limits to what it can accomplish. Reducing financing costs for governments, businesses and families is welcome, but this in itself will not boost investment or ensure that money is well spent. The limits of monetary policy have become visible.

The biggest political failure concerns the “Next Generation EU” fund, Europe’s attempt at a budgetary response to the pandemic. Hungary and Poland threaten to veto the multi-year budget because of the link between payments and respect for the rule of law.

Warsaw and Budapest are likely to back down, as a veto would deprive them of financial assistance at a time of great distress. But these tensions expose the difficulties of setting up a common budgetary response from the EU.

Eurozone countries should instead consider creating their own budgets, to escape the whims of countries that are not members of the single currency.

The summer’s short-lived optimism, as the first outbreak receded, gave Europe the illusion of having handled the pandemic and economic shock as competently as Asia and better than states -United. The second wave shows that it was wrong.

The end of the health crisis promises to be terribly close, but it is not yet here. Worse yet, a vaccine will not cure the long-term damage to the economy. Europe must regain its former urgency.

Ferdinando Giugliano writes columns on the European economy for Bloomberg Opinion. He is also an economic columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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