The coronavirus and quarantine plunged the European economy — the second largest in the world after the US-into the most profound crisis in its post-war history. The worst expectations are being met: the EU is getting poorer faster than the rest of the world.
The EU has suffered more than others in the West from the coronavirus and has imposed the strictest quarantine. Now he is reaping the benefits of the epidemic. According to recent data from Eurostat, the EU economy shrank by 3.5% in the first three months of 2020.
At this rate, it will fall by 13% over the year, and Europe will miss almost 2 trillion euros. And this is although it will have to spend about the same amount on fighting the virus and the crisis.
The results of the first quarter are just a hint of future destruction. The widespread quarantine imposed on the EU only in March and the main blow to the pockets of citizens and businesses will fall on the current second quarter. If the virus does not recede in the second half of the year, and the economy does not begin to recover, the overall damage will be even more significant.
The European Central Bank assumes that the fall in GDP at the end of the year will reach 12% in the countries of circulation of the Euro. The Eurozone includes 19 of the 27 EU countries, and they account for 85% of the EU economy, or 12 trillion out of 14 trillion euros of total GDP.
“The speed and depth of the economy’s decline are unprecedented in peacetime,” Central Bank Governor Christine Lagarde said. “The scale of the decline will depend entirely on how long the quarantine will last and how successful the measures to support people and businesses will be.”
Why is the economy falling?
The short answer is because of the quarantine. To understand precisely how quarantine affects the critical measure of economic success in the post-war world-GDP, you need to remember how it is calculated.
Total GDP is the sum of consumption, investment, government spending, and net exports in a given country. In most states, the first component — consumption-plays an overwhelming role in GDP growth.
It was the one that was hit by the quarantine. People stay at home, earn less and spend less; shops and restaurants are boarded up, tourism and mass events — sports and entertainment-are banned. You can’t even go to a party with gifts.
All this reduces consumption. In France, for example, it fell by 6% in the first quarter.
And the decline in investment was twice as significant-minus 12%. Businesses don’t invest in development; people don’t buy homes, companies don’t create inventory. Part of the investment is deferred, the other is lost forever — during the quarantine period in the absence of income, the money set aside for large purchases and expansion will be consumed.
The two main components of GDP in developed countries are thus dragging the economy to the bottom. In the conditions of restrictions, the third component — public spending-can support it on artificial ventilation until the best times.
And the authorities of countries that have money or the ability to borrow it, massively stimulate the economy from the budget.
They increase benefits, pay private-sector salaries from the Treasury, distribute cash to the entire population, and provide benefits and subsidies to businesses. Not to mention the extraordinary expenditure spent on fighting the pandemic: purchasing medical equipment, repatriating citizens, building temporary hospitals, and developing medicines and vaccines.
The US has already subscribed more than $ 3 trillion to anti-crisis measures, Europe-almost $ 2 trillion. In General, according to the most preliminary estimate of the IMF, $ 8 trillion has already been promised for state support. This is about a tenth of the world’s GDP.
The response to the last crisis was more modest — in 2009, the world’s largest countries spent less than $ 1 trillion on current money.
This crisis is just beginning, and the bill is already several times higher.
Europe is worse off than others.
The most significant political Union on the planet, with a population of 450 million people, suffered the most. The EU accounted for almost half of all pandemic-related COVID-19 deaths.
In the United States, the world’s leading economy, the coronavirus came later and has not yet harmed it as much.
Us GDP declined by 1.2% quarter-on-quarter, compared with a 3.5% drop in the EU. If you extrapolate for the entire year, as is customary for statisticians in the United States, the annual rate of decline of the European economy in the first quarter exceeded 13%. In comparison, America was limited to a modest 4.8%.
At the end of the year, Europe will fall further behind its competitors. According to the International Monetary Fund, the collapse in the European Union (minus 7%) will be more significant than in the US (-6%) and Japan (-5%). The EU’s competitor in the fight for the title of the world’s second-largest economy, China, will avoid falling at all (+1.2%).
The coronavirus has disabled the engine of the European economy. Of the four giants, only Germany was spared a little blood, while France, Italy, and Spain were among the leaders in both mortality and the duration and severity of the quarantine.
As a result, at the average European rate of contraction of 3.5%, the GDP of France fell by 5.8%, Spain — by 5.2%, and Italy — by 4.7%, and for Italians, this is the second consecutive quarter of decline, that is, technically, the country was in a recession.
Statistics from Germany are not expected until mid-may. Still, German officials are already warning that nothing good is waiting for Europe’s largest economy, and the recession will be the worst in post-war years.