Large economies and COVID-19. When BIG economies sneeze, the rest of the world will catch a cold.

Economies such as China, Korea, Japan, Germany and the US are part of global value chains, so their woes will produce ‘supply-chain contagion’ in virtually all nations.

The US, China, Japan, Germany, Britain, France, and Italy account for: 

  • 60% of world supply and demand (GDP)
  • 65% of world manufacturing, and 
  • 41% of world manufacturing exports.

Data are already reflecting these supply shocks. The February 2020 read out on China’s key index of factory activity, the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI), showed its lowest level on record. “China’s manufacturing economy was impacted by the epidemic last month,” said Zhengsheng Zhong, chief economist at CEBM Group. “The supply and demand sides both weakened, supply chains became stagnant.” While China’s workforce is gradually returning to work, the Purchasing Managers Indices from across East Asia have been showed sharp declines in production, especially in South Korea, Japan, Vietnam, and Taiwan.

Macro modellers are busy producing estimates of the size of the shock on the world economy. The OECD estimates that a base scenario, in which the outbreak is contained to China and a few other countries, could imply a world growth slowdown of about 0.5% in 2020.  In a downside scenario, where the spread is spread widely over the northern hemisphere, the 2020 world GDP growth would be reduced by 1.5%.  Most of the impact is attributed to lower demand, but in this scenario the negative contribution of uncertainty is also significant. 

The policy reactions 

The behaviour of the virus is one thing; governmental reaction is another. As Weder di Mauro puts it in her chapter:

  • “The size and persistence of the economic damage will depend on how governments handle this sudden close encounter with nature and with fear.” 

On the dark side, it could become an economic crisis of global dimensions and a long-lasting reversal of globalisation. On the bright side, it could be the moment when policymakers manage a common crisis response. They might even manage to rebuild some trust and create a cooperative spirit that helps humanity tackle other common threats like climate change. 

One idea we think worthy of consideration is scaling up the EU Solidarity Fund. The fund was created in 2002 to support EU member states in cases of large disasters, like floods, earthquakes, volcanic eruptions, forest fires, drought and other natural disasters. The fund can be mobilised upon an application from the concerned country provided that the disaster event has a dimension justifying intervention at the European level.  In 2018, the EU Solidarity Fund dispensed almost €300 million for relief following natural disasters in Austria, Italy and Romania.  

Certainly, the disruptions caused by COVID-19 do amount to a natural disaster.  Scaled up, the EU Solidarity Fund could step in to provide relief for affected regions and people and, beyond immediate relief, it would send an important signal.  We are optimists, so we closed this port optimistically: “Jean Monnet´s famous words that Europe will be forged in crisis might ring true once more.“

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