Eurozone Weakness: Much More Than COVID

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If we looked at most investment bank outlook reports for 2021, one of the main consensus themes was a strong conviction of a rapid and robust eurozone recovery. They were wrong.

Last week, Capital Economics joined other analysts and downgraded eurozone growth, highlighting: “We now think that the euro-zone economy will recover more slowly than we previously anticipated, growing by about 3 percent this year and 4.5 percent in 2022. Meanwhile, euro-zone government bond yields seem unlikely to fall much further, and with Treasury yields set to increase significantly, we expect the widening yield gap to cause the euro to weaken against the U.S. dollar.”

This wave of downgrades, which includes the Organization for Economic Co-operation and Development (OECD) and European Central Bank estimates, comes with the same-old and tired upgrade of next year’s expectations, which will likely be downgraded again further down the line.

Most politicians blame the eurozone weakness on the pandemic and the slow vaccine rollout. It’s partially true. Neither of those two factors are detached from one of the main traits that makes the eurozone consistently disappoint in both growth and crisis periods: massive bureaucracy.

The slow vaccine rollout of the eurozone is evident in Bloomberg Economics’ COVID-19 resilience ranking and in vaccines administered per 100 people falling significantly below Israel, Chile, the United States, or the United Kingdom, despite the eurozone economies having the highest levels of public health care spending in the world. The reason why the eurozone lags behind in vaccinations comes from a bureaucratic and slow process in the approval and purchase of vaccines.

The European Union delayed unnecessarily the approval of vaccines that had already been tested and confirmed by U.S. and UK health authorities, but also implemented a rigid, complicated, and tedious process in reaching commercial agreements with the vaccine supplying companies. Unfortunately, instead of recognizing the mistakes made, politicians decided to start a blame war, accusing AstraZeneca and other companies of not fulfilling contracts, something that has been disproven numerous times but is further delaying the vaccination efforts.

The Financial Times highlighted that “the EU’s faltering vaccination campaign has been hamstrung by a botched central procurement process, supply shortfalls, logistical hurdles and excessive risk aversion from some national medical regulators.” The European political elite was so proud of its health care system and centralized procurement process that they failed to understand the importance of time and efficiency in this pandemic. While the UK has now administered 48.6 vaccine doses per 100 people and the United States 41.9, the EU has only managed 15.1, according to Our World in Data.

The eurozone’s economic problems don’t come from just a slow vaccination rollout, but also overly aggressive lockdowns. Between October and November, Europe’s leading economies decided to shut down the economy aggressively to prevent an increase in cases.

Despite France’s extremely severe lockdown, one of the most aggressive in the world, daily new confirmed cases per 1 million people went from 250 cases in mid October (7-day average) to 522 as of March 26. Daily new cases rose rapidly and fell in the month of November but have risen steadily since January. In Italy, new cases went from 75 in October to 369 by March 26. And in Germany, from 48 to 188 in the same period.

In all of them, daily new cases have steadily risen since bottoming in mid February even with severe lockdowns. Shutting down the economy for prolonged periods of time generates long-term side effects in jobs and growth that will likely hurt the recovery and create important social challenges. We can’t forget that the eurozone still had an unemployment rate of 8.3 percent and more than 7 million furloughed jobs at the end of February.

Massive stimulus plans have been implemented, with the European Central Bank increasing its balance sheet to 71 percent of the eurozone GDP versus the Federal Reserve at 36 percent, and money supply growing at a 12 percent annualized rate in the euro area. Fiscal stimulus is also enormous, with fiscal impulse and liquidity measures ranging between 10 percent (Spain) and 50 percent (Germany) of GDP in the main economies.

It’s important to note that it’s not just how much is spent, but also where and when. A significant part of the fiscal stimulus in Spain, France, Italy, and Germany has been targeted at maintaining current government spending, and the measures to support businesses have only been decisive in Germany and France. However, large and decisive measures to support businesses may fail as prolonged lockdowns lead to an insolvency crisis, and inevitably a relevant part of those support mechanisms will zombify the economy, especially as this was an important risk that had already existed in the eurozone before COVID-19, according to the Bank for International Settlements.

We can’t forget that the eurozone recovery might be to go back to a weak situation, which was evident before COVID-19. Germany was on the verge of recession at the end of 2019, and France and Italy were delivering zero growth in the last quarter. The eurozone slowdown was, in fact, a widespread concern for 2020 despite all the liquidity and fiscal measures implemented, negative rates, massive repurchases of sovereign bonds by the European Central Bank, and a now-forgotten Juncker Plan that was launched as the most important investment program in the EU a few years before the pandemic and whose results were disappointing to say the least.

The eurozone has enormous potential and could become a global leader in the exit from the crisis and attraction of investment. To achieve it, it needs to take urgent measures to reduce bureaucracy, unlock job and business creation potential, and reduce damaging taxation. The time to do it is now.

Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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