“Whatever it takes” to flatten the Covid-19 infection curve means both draconian lockdowns and fiscal stimulus.
Like the eye of a hurricane, the epicenter of coronavirus disease Covid-19 has shifted from Asia to Europe, bringing with it a rising toll of infections, deaths and economic damage. After a messy few weeks in which the region's leaders seemed incapable of hitting on a common response to the crisis — which has hit healthcare, consumer confidence and financial markets all at once — this weekend marked a turning point.
France and Spain announced draconian steps, similar to those seen in virus-stricken neighbor Italy, which has already gone several steps further in imposing a lock-down on citizens. Germany is planning partial border closures, and Austria has banned gatherings of more than five people. The public-health imperative explains the need to strangle the euro-area economy and robbing citizens of basic freedoms, but the very real threat of a knock-on recession means another test looms for governments: The need for fiscal stimulus to cushion the blow.
A ramp-up in cases has sparked the ramp-up in policies. France, Spain, and Italy boast some of the highest confirmed cases of Covid-19 outside China, according to data compiled by Bloomberg, at 5,423, 7,753 and 24,747 respectively. The speed and severity of the infection is picking up: French cases have risen five-fold in just over a week, while Spanish deaths have doubled overnight. After initially holding back from coercive measures beyond shutting schools, French President Emmanuel Macron's administration dramatically hit the accelerator on Saturday, decreeing the imminent closure of all non-essential businesses. (Though on Sunday France also, bafflingly, held a first round of local elections as planned.) Covid-19 is no longer just about highly exposed countries like China or Italy. Its epicenter is European.
Forcing people to stay at home may seem at odds with a region that has for years espoused free movement and borderless travel. But the hope is that this will slow down the spread of the disease and flatten an infection curve that might otherwise take public-health services to the breaking point. That's sensible. Less sensible is the idea of sealing borders, which sounds great to some voters but is ultimately pretty meaningless when you consider the Schengen visa-free travel area covers 4 million square kilometers, 400 million people, and plenty of crossing points by sea, land or air. Especially considering that since the novel coronavirus landed in Europe, myriads of people have been crossing Europe's internal borders, at least some of them bringing the infection with them. Still, overall, there is a certain logic behind what's being done.
The question is whether Europe can also do "whatever it takes" to offset the economic consequences of effectively putting a dome around tens of millions of people. What began this year as a hit to tourism and multinational supply chains running through China is now likely to affect all industries. Italy's lock-down measures are estimated to have hit tourism and transport activity by 90%, retail by 50%, and factory output by 10%, according to former Italian government economist Lorenzo Codogno. The European Union expects the bloc's GDP to shrink by around 1% this year. Replacing a virus outbreak with a recession and more strains on public services looks painful.
Encouragingly, it looks like momentum behind emergency spending plans is growing. The French government is eyeing a package worth over 30 billion euros ($33.4 billion), according to Les Echos, covering partial unemployment, taxes, and state guarantees for small-business loans. That's after Germany's pledge to support businesses via state bank KfW, and Italy's plan for 25 billion euros of spending. The European Commission has pledged 1 billion euros in loan guarantees via the European Investment Bank. The biggest threat to a truly effective crisis response may end up coming from across the Atlantic, rather than from Brussels: There's not much hope that a conference call between G7 leaders scheduled for Monday will bring US President Donald Trump closer to European countries he has accused of spreading a virus he has said is under "tremendous" control in the US.
It is the virus that will have the last word, to paraphrase (badly) Louis Pasteur. If the infection curve fails to flatten as hoped over time, it's hard to see how the promise of more money will calm homebound voters or jittery markets. For now, though, there are some chinks of optimism in the gloom. Europe is opting to freeze its economy in order to heal it, and a recession is likely — but increased commitment by governments to sink budgets deeper into the red, in order to cushion the blow, is a welcome development. Until the response becomes more global and more coordinated, though, any celebration will feel premature.