Breakingviews - Europe virus defences can manage one more lockdown

Visitors walk at the Trocadero square near the Eiffel Tower before the national lockdown introduced as part of the new COVID-19 measures to fight a second wave of the coronavirus disease, in Paris, France, October 29, 2020.

LONDON (Reuters Breakingviews) - Europe’s second-lockdown defences are sound – up to a point. France, Germany and others are imposing tougher rules to limit the spread of Covid-19. The economic shock should be milder than the 11% second-quarter contraction wrought by the first wave, and government spending and the European Central Bank can cushion the blow. Yet the region looks ill-prepared for a protracted crisis.

The emergence of new restrictions and shuttering of businesses will call an abrupt end to Europe’s recovery. The blow will land unevenly: Germany for example is shutting bars, but not non-essential stores like France. But so far, the lockdowns are less draconian.

Even France hopes to keep schools open, making it easier for parents to work. The latest restrictions are happening even as some countries are recovering, especially China, which boosts exports. Berenberg analysts estimate France’s latest lockdown could trigger a 3% to 4% contraction in GDP in the fourth quarter, less than a quarter of the effect between April and June.

Governments still have room to protect the economy. The euro zone’s aggregate fiscal deficit will reach nearly 9% of GDP this year, Citigroup reckons, partly due to emergency spending. Germany will now spend an extra 10 billion euros supporting businesses, and France has earmarked a further 20 billion euros, including for job support schemes.

The ECB still has firepower. It has so far used just 616 billion euros of a 1.35 trillion euro bond purchase programme, which can help governments fund their extra spending needs. On Thursday hinted it could do more.

The key question is how long the latest lockdowns last, or how frequently they happen. Over time, it will become harder for indebted governments to keep providing support. France and Italy’s debt will equal 118% and 158% of GDP next year, the International Monetary Fund reckons. Political tensions will rise, as citizens tire of hardship and job destruction. The European Union’s 750 billion euro recovery fund could help, but it may be delayed, and cannot be easily increased.

The second wave could be as bad as it gets. If governments can improve test and trace systems and boost hospital capacity, future restrictions might be less frequent and less severe. Vaccines and new treatments will also help. But if politicians drag their feet, Europe would face an equally destructive third wave.


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