Europe’s Facing a Fourth Wave of Covid. What This Means for Its Economy.

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Christmas market stalls are closed on Maria-Theresia Square in Vienna, Austria. Austria has returned to a full national COVID lockdown.

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Europe is in the grip of a fourth wave of coronavirus disease infections, which risks further undermining its economic recovery.

For now it is unlikely that the measures taken by policymakers will be as stringent as in 2020, when they shrank the economy by 6%.

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This explains why economists do not expect the impact of the first months of the COVID-19 pandemic to be as devastating. But if there is any doubt that it will have consequences, what remains uncertain is the true extent of this potential effect.

Austria has taken the most radical measures for now, with a national lockdown that closes all stores, those selling basic goods, and requires people to stay at home. However it accounts for just under 3% of the EU’s GDP.

Other governments have not been as radical as health conditions vary from country to country – as the strength of the new spike is correlated with the speed and acceptance of vaccinations across the continent.

Germany, the region’s biggest economic power, is facing a “highly dramatic situation”, according to the late Chancellor Angela Merkel, who has called for new, nationwide restrictions. So far, only a few regional authorities – including the capital Berlin – have begun to act to try to counter the fourth wave.

European stocks fell on November 22 after Merkel’s statement. For now, the three other big EU members—France, Italy and Spain—have avoided dramatic moves. But as noted by Deutsche Bank analyst Jim Reid, “many less affected countries still see cases moving in an upward direction, including France, Italy and the UK”.

So the kinds of measures these governments may have to take, too, “will be important to watch and have huge implications for economies and markets as well,” Reid writes.

While Austria and Germany have some of the lowest vaccination rates in Europe, other governments have no reason to be complacent. ING economists Franziska Behl and Karsten Brzewski note that “the past few years have shown that the feeling of being ‘safe or secure’ can be misleading and can be quickly overtaken by events,” and further sanctions “are at economic risk.” Will increase” stagnation as we enter the new year. ,

By nature, the upcoming restrictions will be less stringent than previous waves of the virus, at least if they are confined to non-vaccinated populations, as could be the case in France and Italy.

Austria has made the vaccine mandatory, but other countries are trying to reach the same goal by different means—for example by restricting normal activities, such as in a restaurant or concert, to carrying a vaccine pass. For the people.

But even restrictions limited to unvaccinated people have an economic impact because they restrict demand – for example, by banning travel for a segment of the population. “While the virus scare is significantly lower than last year, the restrictions hinder economic efficiency – as does the spaghetti bowl of tangled regulation involved in international travel,” wrote Paul Donovan, chief economist at UBS.

At present, no one can assess the impact on growth from the impending sanctions. But they could present a new problem for governments and central banks. If the economy takes longer to recover, the return to some form of fiscal discipline in the countries that were considering it will have to be postponed.

For the European Central Bank, an impending decision on whether to halt its pandemic-specific bond buying program in March next year will have to be made in the shadow of the fourth wave.

“It is not impossible that [then] The fourth wave will be at its peak, with more eurozone countries back into lockdown,” wrote ING’s Brzewski. This may provide a reason for some eurozone central bankers to push for an expansion of the program despite rising inflation.

Write to Pierre Briancon at [email protected]

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