Amid rising COVID-19 cases, the reintroduction of travel warnings and quarantine measures in Europe will undermine economic activity, especially in tourism-dependent countries, leading to a slower recovery in the third quarter. These dynamics will probably force governments to introduce additional stimulus measures, which would further worsen their deficit and debt situations.
- On July 26, the U.K. government announced that people returning from Spain will be put under a 14-day quarantine, and that similar measures would be considered for those arriving from France and Germany.
- On July 27, Germany announced mandatory COVID-19 testing at airports for people returning from countries designated as high-risk, such as Turkey and those in the Western Balkans.
- France, Belgium, Germany, Netherlands and Poland have begun advising their citizens to forgo non-essential travel to high-risk areas such as Spain's Catalonia and Aragon regions, where COVID-19 cases are on the rise.
Additional travel restrictions are likely in the coming weeks, which will have a negative impact on the air travel, restaurant and hotel sectors of multiple European economies, particularly in the south. New restrictions have primarily targeted Spain, where new infections have risen in recent weeks to levels similar to when the lockdown was lifted in mid-June. But countries such as Italy and Greece could experience similar warnings if infections escalate there, which is possible now that most lockdown measures have been lifted. Even without concrete measures, uncertainty about future restrictions could discourage tourists from visiting those countries. This would have a negative impact on their economies, which are very dependent on tourism. A drop in tourism would affect airlines operating those routes, as well as restaurants, hotels and any other activities that depend on travelers and experienced a timid recovery in activity in July compared with May and June. While domestic tourism may somewhat increase because of the restrictions on international travel, it will not be enough to compensate for the drop in foreign visitors.
Weaker-than-expected economic activity in Southern Europe will almost certainly precipitate a longer recovery extending well into 2021. Southern governments hoped that the reactivation of economic activity during the third quarter, with tourism and softer social distancing measures enabling them to lift the expensive stimulus policies (such as cheap loans for companies, tax delays and generous furlough schemes) introduced during the second quarter. Spain's central bank recently said the Spanish economy would grow by between 16 and 19 percent in the third quarter after a contraction of more than 20 percent in the second quarter, though this prediction could prove too optimistic. Weaker-than-foreseen economic performances may force governments to keep stimulus in place or even introduce new measures, which would come at the expense of worsening deficits and higher debt levels. The European Union recently adopted a massive stimulus package, but it will not be operative for months and will also force national governments to use their own money. In the meantime, high debt levels among European companies could undermine investment, while rising unemployment could weaken consumption. As a result, the Continent's pandemic-induced recessions could continue well into 2021.
