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Post-coronavirus scenarios for Europe

Today three risk factors influence the future developments in Europe simultaneously. Each of them may potentially inflict crisis events, however, they are rather more amenable to cope with if we confront each of them separately. That is coronavirus which reached the pandemic level, unprecedented fall of the stock markets and oil price war. The outcome of all these events taken together may result in a situation when at the year end balance sheets may be broken,companies may bankrupt and people may find themselves out of jobs.

Coronavirus crisis has revealed and exaggerated all the weak points and shortfalls of modern world economy in general and states’€™ health care systems in particular. It appears that disrupting all the business circulation and daily routine around the world is far easier than it might seem early. Today Europe and US do really know what the butterfly effect is. Well, not butterfly but bat effect, to be clear.

Some experts anticipate the situation close to the economic downturn in 2008. President of the European Central Bank Christine Lagarde warned the EU leaders about the risk of a new great financial crisis and called them to take actions to increase spending in order to prevent devastating economic effect of Covid-19. Among the measures which are expected to be taken by the ECB is cutting interest rates to provide cheap funding for banks to keep cash circulating across the Union. The local governments are required to support business affected by Covid-19 through lending and boosting fiscal stimulus.

However, there is quite a difference between the today’s situation and that of 2008. At least, we should take into account the pace of the virus which is spreading much faster than financial crisis and could inflict more harm to the economy that financial crisis did. Besides, those policymakers who should resist it, fall under the risk of being infected.

The Vienna Institute for International Economic Studies (wiiw) presented four scenarios for the economic impact of the coronavirus, including a pre-coronavirus baseline, a “€˜mild”€™ (best-case), a “medium”€™, and a “severe€” (worst-case) scenario. Sever scenario becomes the most likely given the recent days events.

Overall, the “severe”€™ scenario predicts 1.1 percent growth in Central, East and Southeast Europe (CESEE) this year, making it the worst 12 months outcome for the region since the global financial crisis. €”Severe”€™ scenario assumes that the spread of the virus can be contained by mid-2020, and that a strong and coordinated policy response is enacted by the world’s major economies. Failure to meet one or both of these conditions means the economic fallout will be even more negative and longer lasting.
In terms of states, in all scenarios, the CIS countries and Turkey would be worst affected, with the EU member states and some Western Balkan countries faring relatively better. This is due to the better state of economies of the EU member states, their developed healthcare systems, and ability to enact expansionary fiscal and monetary policies to offset the downturn.

On aggregate, wiiw’€™s projections indicate that the negative economic consequences of the coronavirus for these countries will be less severe than in the rest of CESEE. By contrast, the ability of countries in the Western Balkans, Turkey, the CIS and Ukraine to counteract the economic downturn will be limited by considerations of macro-financial stability and less fiscal room for manoeuvre.

These countries also generally have worse healthcare systems. In the report, other key areas of vulnerability for CESEE countries are highlighted. Countries reliant on energy exports (Russia and Kazakhstan) or tourism (Croatia, Slovenia, Albania and Montenegro) are likely to be badly affected.

Capital flight is a major risk, especially for countries reliant on dollar funding. Beyond 2020, wiiw’€™s outlook remains broadly unchanged, although the institute sees material downside risks depending on the scale of the policy response and how quickly the virus is contained.

Underlying growth in the global economy was already close to its weakest level since the global financial crisis, and this will not change fundamentally during the forecast period. In 2021-2022, wiiw expects economic growth of below 3 percent in EU-CEE, whereas growth in the Western Balkans should hold up a bit better.

Outside EU-CEE and the Western Balkans, pre-coronavirus wiiw 2 had made significant upward revisions to its GDP forecasts for the bigger economies (Turkey, Russia and Ukraine), based on more expansionary fiscal and/or monetary policies. However, without structural reforms there are substantial negative risks to the sustainability of growth. The coronavirus has temporarily diverted the attention of economists and policy makers from other fundamental issues facing CESEE.

One of the biggest issues is the shortage of labour, which is likely to become more acute. Digitalisation could help CESEE to increase the productivity of its economies by developing more productive service sectors and increasing the servitisation of their production processes. The region is generally well equipped for further digitisation. However, wiiw highlights that it is important to develop adequate government policies to ensure (re)skilling of the labour force and to support investment in new technologies.

In other words, today we may say for sure -€“ coronavirus is not only about health, that is about new way of living, doing business, working and travelling which means the new challenges for changing global order.

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