What Happened
European stock markets — including those in London, Frankfurt, Paris and Milan — plunged March 9 amid mounting concerns over the coronavirus epidemic. A slew of new coronavirus cases across the Continent, along with the recent drop in global oil prices following OPEC's failure to agree on a unified response to the expected drop in demand, has further shaken investor confidence in EU economies, which were already slowing before the outbreak.
The Latest in EU Countries
Italy: With the highest number of coronavirus cases in Europe, Italy has taken the most drastic measures to combat the outbreak. On March 8, the Italian government approved a decree restricting the movement of people in 15 of the country's central and northern provinces until April 3 — a measure that will affect roughly 16 million people. Police and armed forces will control access to the areas under quarantine, and people will only be allowed to enter or leave if they have enough justification (such as a serious work or family reason). Schools, gyms, and movie theaters have been closed in the restricted areas, while restaurants and bars are only allowed to operate between 6am and 6pm. Milder measures have also been taken in the rest of the country.
The question is how effective these measures will be, and whether the Italian authorities will be able to enforce them evenly in such a large territory. One thing is certain: the measures will come at a high economic price for Italy. Northern Italy, the epicenter of the outbreak, represents around 30 percent of the country’s gross domestic product (GDP) and is home to its industrial and financial sectors. In response to the outbreak, the government has announced roughly 8 billion euros ($9.14 billion) in measures, including tax cuts for companies and additional spending in the healthcare system. But this may not be enough as the virus continues to slow down economic activity in a country that was already on the brink of a recession prior to the coronavirus crisis. The silver lining is that Italy will likely have more rope from the EU in terms of deficit spending.
Germany: The government is worried that the coronavirus outbreak will further slow down the German economy, which already saw flat growth in the final quarter of 2019. On March 9, Berlin announced moderate measures to boost growth including cheap loans for companies, a delay in tax deadlines and partial compensations for businesses planning to reduce working hours for their employees. Berlin also announced 3.1 billion euros ($3.5 billion per year) of extra investments between 2021 and 2024, which will reportedly be funded by the government's fiscal surplus. So far, Germany has not closed schools and universities, but the chances of introducing such a measure will increase if the number of infected people in the country continues to grow. Contracting global demand is already having a negative impact on Germany’s export-oriented economy. Should Germany follow Italy's lead and start imposing similar severe measures to prevent the virus, it could further exacerbate these economic headwinds by curbing German domestic consumption.
France: France has the second-highest number of coronavirus cases in Europe after Italy, but the government has yet to quarantine any regions. On March 8, the French government banned all gatherings of more than 1,000 people in an attempt to prevent the virus from spreading. Paris has also said that the nationwide municipal elections will still take place on March 15 as scheduled. A handful of schools and day-care centers with high numbers of cases have already been closed, but so far the Elysee has not taken any country-wide measures in that direction. So far, the coronavirus scare has not discouraged unions and other groups from protesting the government’s controversial pensions reform plan, but this could change should the cases in France escalate, which may help clear the way for Paris to pass the reform.
Greece: The number of coronavirus cases in Greece has so far been relatively low. But on March 9, Greek authorities said they were responding to a potential case in the island of Lesbos, which is home to tens of thousands of asylum seekers. If confirmed, this would be problematic as most of the asylum seekers on the island are crammed in crowded migrant camps that could be a fertile ground for rapid contagion. The Greek economy is heavily reliant on tourism, and a worsening of the coronavirus situation in the country could discourage travelers from visiting.
Gauging the EU's Next Step
The coronavirus crisis is increasing pressure on the European Central Bank (ECB) to take action to counter the potential economic impact. With interest rates already at record lows, the ECB will consider measures to provide extra liquidity to banks and businesses in the eurozone during its next policy meeting on March 12. It may also consider expanding its bond-buying quantitative easing program, but the ECB is running out of assets to purchase. The European Commission, for its part, will probably become more flexible in the enforcement of debt and deficit rules in the bloc, so that EU countries have more room to increase spending or cut taxes to mitigate an economic downturn, letting Italy and other southern European countries breathe a sigh of relief.
