THE EUROPEAN ECONOMY BEFORE AND AFTER THE PANDEMIC Laurence Boone, OECD Chief Economist 24 April 2020 / Académie de notre Europe
Key messages How the crisis is impacting countries • Pandemic: an uneven shock • Confinement: indicators suggest different impacts • Estimates of initial impact with also vary with countries specialisation Policy support • Direct fiscal support varies with fiscal space • Indirect fiscal support is also conditional on fiscal space • Monetary backstop allows sufficient flexibility to care for all thanks to new programs Looking ahead • There has been little convergence since the last financial crisis • It is important the pandemic does not widen the gap in economic performance between countries • Recovery Fund: the key issues
2
HOW COVID-19 IS AFFECTING ECONOMIES
3
The pandemic is severe yet uneven across countries Death toll
Number of intensive care beds
Confirmed Covid-19 deaths per million people
Per 100 000 population, 2020 or latest available 40 35 30 25 20 15 10 5 0
DEU AUT BEL FRA CHE HUN GBR POL ESP ITA NOR DNK NLD IRL
Note: RHS: There may be differences in the notion of intensive care affecting the comparability of the data. Data refers to adults only in Belgium and Ireland, to all ages in Germany, England and Spain. Data in France includes "lits de rĂŠanimation adulte"(except severe burns) and "lits de soins intensifs"(except neonatology) but excludes "lits de surveillance continue adulte et enfants"and "lits de rĂŠanimation enfants". GBR data limited to England. Data for Italy and England (2020), Belgium, France and Poland (2019), Austria, Norway, Switzerland, Hungary and The Netherlands (2018), Germany, Spain (2017), Ireland (2016), and Denmark (2014). Source: Beyond Containment: Health systems responses to COVID-19 in the OECD, OECD (2020); Our World in Data.
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Confinement measures vary Confinement across countries
Google trends around lockdown announcements
Percent of OECD European countries implementing strict social distancing measures
ITA
FRA
Note: LHS: Focuses on 26 OECD European countries. RHS: Series show seven-day moving averages since 20 February 2020. Each ‘tracker’ is an index of the relative search intensity for keywords related to construction, retail sales and trade i.e. it is an index of Google Trends categories. Trackers are compiled based on search categories that are harmonised across countries and languages. Data as of 10 April 2020. Vertical lines represent approximated national lockdown announcements or tightened recommendations to stay home. Source: OECD Covid-19 Policy Tracker; Google Trends.
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Illustrative estimates of the initial direct impact of shutdown - impact will be large Potential initial impact of partial or complete shutdowns on activity % GDP at constant prices Greece
Germany
Spain
Poland
Czech Republic
Portugal
United Kingdom
Italy
Netherlands
France
0 -5 -10 -15 -20 -25 -30 -35 -40
Transport manufacturing Retail and wholesale trade Professional and real estate services Total
Construction Hotels, restaurants and air travel Other personal services
Note: The sectoral data are on an ISIC rev. 4 basis in all countries. The sectors included are manufacturing of transport equipment (ISIC V29-31), construction (VF), wholesale and retail trade (VG), air transport (V51), accommodation and food services (VI), real estate services excluding imputed rent (VL-V68A), professional service activities (VM), arts, entertainment and recreation (VR), and other service activities (VS). The latter two are grouped together as other personal services in the figure. Full shutdowns are assumed in transport manufacturing and other personal services; declines of one-half are assumed for output in construction and professional service activities; and declines of three-quarters are assumed in all the other output categories directly affected by shutdowns. Sources: OECD Annual National Accounts; and OECD calculations.
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POLICY SUPPORT
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Government financial support is sizeable Official estimates of financial help to the economy % GDP
Budget balance impact
Tax and social security contribution deferrals
Loans, guarantees and other contingent liabilities
30 27 24 21 18 15 12 9 6 3 0
DEU
GBR
FRA
ITA
ESP
Note: For country-specific notes, see the Annex. Shows official estimates, when available, of financial help included in emergency packages announced by governments in response to the Covid19 crisis, as of 20 April. In many cases, they are highly uncertain due to an unknown duration of the crisis and take-up of various programmes by the private sector, and may not be comparable across countries.
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Job support Measures in response to Covid-19
Changes to dismissal regulation
•
19
Income support to quarantined workers
•
50
Helping people stay in their homes
54
Income support to sick workers
•
62
Reducing workers’ exposure to Covid-19
France
Germany
Share of OECD European countries that have announced new or expanded measures
Replacement rate: 60 to 80% of basic pay. Cover 100% of social insurance contributions for the lost work hours (compared to 50% during the GFC) STW expanded to cover temporary/agency work
•
•
Replacement rate: 84% of gross wage (100% if the workers participate in training or are paid at the minimum wage) Limitations to economic dismissals
69
Help with unforeseen care needs Adjust hours of work and short-time schemes
92
Income support to people losing job/income
92
Financial support to firms
• 100
0
Spain
Italy
81
10 20 30 40 50 60 70 80 90 100 %
•
Replacement rate: 80% of lost pay for employees sent home for a maximum of 52 weeks. Limitations to economic dismissals.
• •
Replacement rate: 70% of previous earnings. Limitations to economic dismissals
Source: OECD (2020), “Supporting people and companies to deal with the Covid-19 virus: Options for an immediate employment and social-policy response”, ELS Policy Brief on the Policy Response to the Covid-19 Crisis, OECD, Paris, http://oe.cd/covid19briefsocial; ASP-DGEFP-Dares; and OECD calculations.
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The ECB is providing support to all countries •
Addition of €120 bn of net asset purchases to be added until the end of the year
•
Easing of conditions for TLTRO III programme to support bank lending • Interest rate 25bps below the average rate applied in main refinancing operations. If net lending reaches benchmark, interest rate as low as 25bps below average deposit facility rate • Borrowing allowance raised from 30 to 50% of eligible loans
•
New LTRO to provide immediate liquidity support to banks and safeguard money market conditions until the fourth operation of TLTLRO III
•
Pandemic Emergency Purchase Programme (PEPP) of €750 bn: • The benchmark allocation across jurisdictions will continue to be the capital key of the national central banks • However, purchases will be conducted in a flexible manner, allowing for fluctuations across asset classes and among jurisdictions • A waiver of the eligibility requirements for securities issued by the Greek government • Expansion of the range of eligible assets to include non-financial commercial paper
•
Reduction in capital requirements to support financial conditions
•
Reactivation of swaplines with the Danish and Croatian national banks 10
The EU has provided support on multiple fronts Fiscal •
Activated the general escape clause of the Stability and Growth Pact and allowed State Aid to struggling businesses
•
Support to mitigate Unemployment Risks in an Emergency (SURE). loans granted on favourable terms from EU to Member States. EUR 100 billion (0.7% EU27 GDP)
•
Coronavirus Response Investment Initiative (CRII) EUR 37 billion to accelerate the implementation of cohesion policy
•
Coronavirus Response Investment Initiative Plus (CRII+), possibility of transfer across the 3 cohesion funds and 100% EU co-financing rate in 2020-21
•
Pandemic Crisis Support credit lines within the framework of the European Stability Mechanism (ESM). Access granted will be 2% of the respective country's GDP as of end-2019 (about €240 billion in total).
•
EIB to create a EUR 25 billion guarantee fund, which will support up to EUR 200 billion of financing for companies (especially SMEs).
Health •
EU Emergency Support Instrument for the healthcare sector, with EUR 3 billion from the EU budget to directly purchase or procure emergency support on behalf of Member States,
•
EC pursuing joint public procurements of protective equipment, which reinforces member states' negotiating position towards the industry. 11
LOOKING AHEAD: STRIVING TO RESTORE CONVERGENCE
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Economic performance has diverged GDP per capita relative to that of Germany has fallen since the GFC NLD
FRA
ITA
Unemployment rates in other European countries remain elevated compared to in Germany
ESP
% 130
% 28
120
24
110
NLD
DEU
FRA
ITA
ESP
20
100
16
90 12
80
8
70
4
60 50
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
2016
2018
2020
0
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
2016
2018
2020 13
Source: OECD database, OECD calculations.
The incomplete financial architecture has perpetuated the bank-sovereign nexus Share of a country’s government debt securities held domestically % of total bank assets Italy
Spain
Portugal
Germany
12
12
10
10
8
8
6
6
4
4
2
2
0
2000
2002
2004
Source: ECB; and OECD calculations.
2006
2008
2010
2012
2014
2016
2018
0
2000
2002
2004
2006
France
2008
2010
Netherlands
2012
2014
2016
2018 14
Policy responses in Europe: what more could be done? Coordinate health exit strategies
Fiscal support for the recovery
State aid rules and level playing field
• Harmonised • ECB: has more space, • Large contribution of statistics but fiscal needs to play individual state • Healthcare capacity a role balance sheet; (coordinate along • “Recovery Fund”: should become key GVCs) define objectives, more European • Tests, treatments , clarify maturity, precise vaccines widely grants or loans, • Cooperative available governance of projects spending 15
ANNEX
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Country-specific notes for Government financial support •
DEU: State loans and credit guarantees include EUR 100 bn (2.9% of GDP) for recapitalisation of larger companies and important start-ups by an economic stabilisation fund and an extension of the limit on available credit guarantees by the state-owned development bank KfW of EUR 357 bn (10.4% of GDP). On 6th April, another immediate loan scheme for SMEs via KfW was announced, but at the moment there is no official estimate of its size. The estimate of the volume of announced tax deferrals is not available.
•
GBR: Welfare measures with direct budget impact include the Coronavirus Job Retention Scheme and the Self-Employed Income Support Scheme. Their size will depend on the take-up and duration, the number used (GBP 14.7bn; 0.7% of GDP) is based on the Resolution Foundation estimates, it assumes 3.5 million people using the schemes for 3 months. Contingent liabilities include over GBP 330 billion (14.9% of GDP) of state loans and guarantees for struggling businesses, through the Coronavirus Corporate Financing Facility (CCFF) and the Coronavirus Business Interruption Loan Scheme (CBILS).
•
FRA: Credit guarantees are assumed to apply to EUR 300 billion of bank loans. The French government is currently debating on adopting measure to recapitalise private firms in distress worth EUR 20 bln, that has not been included.
•
ITA: State loans and credit guarantees include the expected multiplication effect on the credit market. Extra liquidity will be provided by the moratorium on debt repayment and debt interest payments until end-September on an approximated volume of firm loans of EUR 220 bn; the moratorium on mortgage payments for vulnerable households. Estimates for these measures are not available. The Italian government is currently discussing a further fiscal stimulus (“decreto Aprile”) of EUR 25-70 bn (1.4%-3.9% of 2019 GDP), that has not been included.
•
ESP: The wage support and welfare measure are estimated at EUR 5 bn for one month; if the crisis lasts longer, spending will be higher. Measures to support credit consist of EUR 102 bn in state guarantee, EUR 10 bn capital increase in the Instituto Credito Oficial (ICO) to boost its lending capacity and includes EUR 80 bn of private capital. Extra liquidity will be also provided by the 6-month moratorium on mortgage payments for vulnerable households, the moratorium on gas and electricity bills for vulnerable households and SMEs and self-employed in distressed sectors, and the 1-year deferral of debt payments for SMEs for debt contracted with the Secreteria General de Industria. Estimates of these measures are not available. The Spanish government is currently discussing additional fiscal measures to support SMEs (tax deferral), that has not been not included.
•
USA: Tax referral represent the fiscal cost incurred in 2020 as estimated by the Joint Committee on Taxation (JCT).
•
KOR: In addition to the number shown, measures with direct budget impact include WON 9.1 trillion (0.5% of GDP) emergency relief payment for low-income households which will be budget neutral (financed by cuts of other budget items). Contingent liabilities include WON 48.5 trillion (2.5% of GDP) used to create funds aimed at stabilising financial markets (corporate bond market stabilisation fund, short-term monetary market stabilisation fund, stock market stabilisation fund and a primary collateralised bond obligations scheme).
•
JPN: The total recent fiscal package to cope with downside risks, including those related to the COVID19 crisis is JPY 108 trillion, including around JPY 40 trillion of public spending and around JPY 68 trillion of state loans and guarantees. The size of the fiscal package announced on April 7 might increase by an additional JPY 8.9 trillion, not included. Estimates of tax deferral measure are not available.
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OPTION A
Confinement and mitigation measures vary Confinement across countries
Covid-19 testing
Percent of OECD European countries implementing strict social distancing measures
Number of Covid-19 tests per thousands people
Note: LHS: Focuses on 26 OECD European countries. RHS: For testing figures, there are substantial differences across countries in terms of the units, whether or not all labs are included, the extent to which negative and pending tests are included and other aspects. Source: OECD Covid-19 Policy Tracker; Our World in Data.
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OPTION B
Job support Measures in response to Covid-19
Short-time working schemes
Share of OECD European countries that have announced new or expanded measures
Number of requests in France for short-time work schemes as a result of the Covid-19 crisis Number of requests filed (cumulative, LHS)
Changes to dismissal regulation
19
Number of workers concerned (cumulative, RHS)
12
Income support to quarantined workers
50
Helping people stay in their homes
10
54
Income support to sick workers
8
62
Reducing workers’ exposure to Covid-19
69
6
Help with unforeseen care needs
81
Adjust hours of work and short-time schemes
92
Income support to people losing job/income
92
Financial support to firms
4 2 100
0
10
20
30
40
50
60
70
80
90 100 %
0
1/Mar
8/Mar
15/Mar 22/Mar 29/Mar
5/Apr
12/Apr
Source: OECD (2020), “Supporting people and companies to deal with the Covid-19 virus: Options for an immediate employment and social-policy response”, ELS Policy Brief on the Policy Response to the Covid-19 Crisis, OECD, Paris, http://oe.cd/covid19briefsocial; ASP-DGEFP-Dares; and OECD calculations.
19/Apr 19
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