Contribution by Fabio Panetta, Member of the Executive Board, European Central Bank, published by Politico on 21 April 2020.
The case for common European economic action in response to the coronavirus crisis has often been presented as a call for solidarity. As noble as that motivation may be, it’s not the only reason for governments to act together. A strong, symmetric fiscal response that offsets the economic damage from the pandemic is in the economic interest of all countries in the eurozone.
The disadvantages of an asymmetric response are self-evident.
In the realm of public health, if countries are forced to lift necessary public health measures (e.g. lockdowns) prematurely because the economic costs of containment are too high, the virus will inevitably begin to spread again and will further damage the economy.
When it comes to the European economy, there’s a similar risk of contagion. The economies of the eurozone are tightly interlinked through supply chains, financial connections and trade relationships. As a result, a slump in a large part of the eurozone will depress growth and employment across the entire region.
These dynamics were on display a decade ago during the sovereign debt crisis, but today’s crisis exacerbates them in two ways.
First, because of the global nature of the shock, European countries cannot redirect their production to satisfy demand from the U.S. or China, as they did a decade ago. This makes member countries dependent on trade within the eurozone, which represents 45 percent of the currency area’s GDP.
Second, the amplification of the shock across supply chains will be greater this time. Eurozone firms are strongly integrated into global value chains, with participation rates 60 percent higher than for U.S. or Chinese firms. This integration is today three times tighter within the region than with the rest of the world.
Analysis by the European Central Bank has found that these supply chain interlinkages will multiply the economic damage of the coronavirus lockdowns. As an illustration, we estimate that an initial GDP decline of 5 percent in major eurozone economies would turn into a 7 percent fall in output for the whole area. A GDP decline of 15 percent would provoke a 20 percent loss across the eurozone. And this only considers the recessionary phase, not the subsequent phase of weak trade if the euro area economy remains depressed.
The whole interview can be read here.
ecb.europa.eu
