Megan Greene is economist and a senior fellow at Harvard Kennedy School.
The coronavirus crisis is what economists call a symmetric shock. While some countries have seen higher death tolls than others, none have been spared the economic impact of closures of businesses and other measures required to bring the epidemic under control.
Where things are likely to be different is in the recovery. Different countries will come out of this crisis at different speeds, depending on the structure of their economy and the financial support they can offer workers and businesses during and after the downturn. That’s particularly true in the eurozone, where the north-south split is likely to be aggravated as some countries recover faster than others.
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With so many unanswered questions about the epidemic, the only certainty is that its economic impact has already been devastating.
The eurozone did not head into this crisis on strong economic footing. It grew by a paltry 0.1 percent in the fourth quarter of 2019 compared with the previous quarter. The first quarter of this year was even worse, with eurozone GDP falling a record 3.8 percent as economies shut down to contain the virus.
France and Italy fell into technical recession (two consecutive quarters of contraction), while Spain’s GDP fell by the most since the national statistics institute (INE) began this series in 1995.
Even places like Sweden, which elected not to put in place a strict lockdown, or the Czech Republic, which was largely spared by the epidemic, are projected to see their economies shrink by 6 percent or more this year.
More granular monthly data paints an even bleaker picture. With non-essential shops closing across the eurozone in March, retail sales plummeted by an unprecedented 11.2 percent compared with the previous month. German factory orders dropped a record monthly decline of 15.6 percent. In April, the purchasing manager’s index for services and manufacturing crashed to 13.5 (anything below 50 reflects a contraction), the lowest ever recorded.
The European Commission expects output in the eurozone to drop by 8 percent this year before rebounding by 6 percent in 2021. This assumes a V-shaped recovery, which seems highly uncertain in Europe, given the inevitable shuttering of small businesses and the potential for further waves of the epidemic.
Then there’s the fact that not all countries are equally equipped to bounce back. And worryingly, giving the pre-existing imbalances in the eurozone, those slower to recover are likely to be in southern Europe.
Take Italy and Spain, the two eurozone countries hit fastest and hardest by the coronavirus. These countries are also weighed down by elevated public debt (in Spain’s case, a legacy of the euro crisis), which has constrained their ability to provide stimulus.
Italy had debt of 135 percent of GDP in 2019 while Spain’s was 96 percent. Greece has acted quickly to stem the virus’s impact, but it also suffers from the highest debt burden in Europe at 177 percent of GDP.
Compare their situation to that of Germany, which has public debt below 60 percent of GDP and a budget surplus. Germany’s freedom to maneuver has already been reflected in the assistance it has been able to provide its companies.
Germany, which makes up roughly 28 percent of the eurozone economy, is home to about 52 percent of the stimulus measures put in place to offset the impact of the coronavirus crisis so far.
The structure of a country’s economy is another factor that will impact how fast it can recover. To begin with, countries with a large proportion of small- and medium-sized enterprises (SMEs), are likely to be less resilient as these businesses usually have less collateral to offer banks for loans.
Again, it’s bad news for the south. SMEs generate around 67 percent of value added in Italy, 63.5 percent in Greece and 61.3 percent in Spain. This compares with around 56 percent on average in the EU and 54 percent in Germany. SMEs generate around 88 percent of employment in Greece, 78.5 percent in Italy and 72 percent in Spain. This compares with an EU average of roughly 67 percent and roughly 64 percent in Germany.
Then there’s the fact that these countries are reliant on hard hit sectors that will take a while to rebound, such as tourism, travel and hospitality. Tourism accounts for roughly 20 percent of GDP in Greece, 15 percent in Spain and 13 percent in Italy and Cyprus.
The lack of a common European response to the crisis means that the epidemic and its aftermath is likely to widen the eurozone’s divides. So far, stimulus efforts have mainly been left to national governments, with the European Central Bank buying up assets to ensure borrowing costs stay low.
The trouble is that it’s not clear how long the ECB can keep this up — especially now that it is facing pressure from the German Constitutional Court over its intervention during the euro crisis.
The eurozone will not be alone in facing collapsing economic activity and mounting debt, but it is unique in having a common currency shared among very different economies
As the pandemic exacerbates the pre-existing north-south divide in the eurozone, there is a significant risk that the currency union will tumble into another sovereign debt crisis. Once again, European leaders might find themselves having to choose between debt mutualization and richer countries assuming risk for the less resilient ones or another round of bailouts and painful austerity for the south.