BERLIN — What happens when you subject a flagging economy to a cocktail of geopolitical crisis, a pandemic scare and investor flight?
Europe is about to find out.
Financial markets have been roiled for weeks as investors tried to gauge the impact that coronavirus will have on the global economy. Those worries morphed into outright panic early Monday. The dual blow of a collapse in the price of oil — triggered by a dispute between Russia and Saudi Arabia over production cuts — and Italys decision to seal off swathes of its north due to coronavirus triggered a broader sell-off, the magnitude of which the world hasnt seen since the global financial crisis.
Stock markets tumbled across Asia and Europe. Germanys blue-chip stock index, the DAX, suffered its worst one-day decline — a drop of 8 percent — since the terror attacks on September 11, 2001. Investors parked untold billions in German, French, British and, above all, American bonds, seeking the relative safety of government notes.
Europes leaders had been quietly hoping the virus would retreat and the economic impact on the Continent would be limited. In recent weeks, Brussels top leaders have been more focused on how to forestall a new refugee wave and prevent all-out war between Turkey and Russia in Syria.
“The only two questions are how strong the negative impact will actually be and how long it will last” — Carsten Brzeski, chief eurozone economist at ING
Mondays market panic suggested the real crisis for Europe may just be starting.
French Finance Minister Bruno Le Maire warned that the impact of the virus would be “severe” and called on Europe to stitch together a “massive” stimulus plan.
Much of the worry is rooted in uncertainty; no one knows how long the coronavirus scare will linger or how many lives will be lost. The only thing one can say for certain is that the economic impact will be considerable.
“COVID-19 has changed everything,” said Carsten Brzeski, chief eurozone economist at ING, using the acronym for the disease triggered by the coronavirus. “The only two questions are how strong the negative impact will actually be and how long it will last.”
French Economy and Finance Minister Bruno Le Maire | Eric Piermont/AFP via Getty Images
Thats particularly true for Germany, the Continents economic engine, which was just seeing a slight rebound in its sluggish industrial sector when coronavirus hit. A look at the trajectory of the virus spread in Italy suggests Germany is lagging by about 10 days in terms of verified infections. The number of coronavirus infections in Germany broke through the 1,000 mark over the weekend, the point at which the virus in Italy exploded in late February. Italy now has about 7,300 verified cases and has recorded more than 360 deaths.
By late Monday, the number of confirmed cases in Germany had risen to nearly 1,200. About 500 of the infections were in the state of North Rhine-Westphalia, Germanys industrial heartland, which accounts for more than 20 percent of the countrys economic output. The first two deaths in Germany, both reported on Monday, also occurred in the state.
Germanys governing coalition agreed late Sunday on a package of emergency measures to cushion the economic impact, including easier access to financing for companies, credit guarantees and tax relief. Chancellor Angela Merkel, who has faced criticism at home for not addressing the brewing crisis more directly, broke her silence on Monday, signaling the government stood ready to take additional measures to support the economy.
“Were keeping an eye on the German and European economies,” Merkel said during a speech, adding that cracks had already begun to appear.
Germany is doubly exposed to the effects of coronavirus because of its reliance on exports. The countrys two biggest export partners outside of Europe — the U.S. and China — are also struggling to bring the outbreak under control.
Germanys solid public finances (the country has recorded a budget surplus in recent years) leave it well-placed to confront whatever shocks lie ahead.
Ursula von der Leyen, president of the European Commission | Kenzo Tribouillard/AFP via Getty Images
The same cant be said for the rest of Europe, especially Italy, which was already struggling to keep government spending within EU limits when the coronavirus hit.
The EU is prepared to “use all the necessary and possible flexibilities for these exceRead More – Source