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Consequences of the corona pandemic: How the economic crisis is dividing the world economy

If all goes well, the world could be better after this crisis. This is how Christine Lagarde sees herself, who describes herself as an optimist. If eurozone countries are now investing in the right places, the head of the European Central Bank (ECB) argued this week, Corona could make the economy greener and more digital. But Lagarde also warns: Governments must not close their rescue programs too soon. The risk that the economy will collapse again with the growing number of crowns is too great. The current recovery is too fragile.

This is also shown by the forecasts that economists present in a row today. With the exception of China, the economy will not grow in any of the major countries this year, according to the International Monetary Fund (IMF). The country in which the crisis arose is being abandoned particularly quickly. Experts in Washington believe that China’s economy could grow by almost two percent this year (see box below). In large industrialized countries, however, it collapses by almost six percent.

Germany is still doing relatively well

This shows how a severe corona pandemic and its economic consequences are already affecting individual countries. The world is slowly dividing into states that can cope with this economic crisis to some extent, and states that will have to fight it for years. There are big differences in Europe too.

Graphics: Tagiegpiegel / Rita Böttcher

While the IMF expects Germany to economic down six percent this year, the crisis in Spain is more than twice as bad. According to forecasts, the economies in France and Italy will also collapse much more sharply than in Germany.

Europe risks further economic separation. On the one hand, it is related to the number of infections. Countries with a particularly high number of corona cases had to take more stringent measures in the spring. For example, the first lock-up in France not only lasted longer, but also affected more industries. While work on the site itself continued in April and May, two-thirds of the work in the neighboring country was dormant.

France has reintroduced a curfew. Photo: Michel Spingler / AP / dpa

On the other hand, the economic structure of the country is also crucial in this crisis. The more it depends on personal services such as tourism, the stronger the decline. This applies, for example, to Greece, where the IMF expects minus 9.5 percent this year.

The crisis has hit Spain twice

Particularly bad are countries that suffer from long-term blockages and are also heavily dependent on tourism – such as Spain. With an economic downturn of almost 13 percent, the crisis hit the country harder than any other in the eurozone. The situation there is complicated by the fact that the country has many small businesses, most of which have little or no reserves. The prospects are not good, especially for young Spaniards: Even before the corona pandemic broke out, youth unemployment was more than 40 percent.

In early October, workers at a restaurant in Barcelona protested. Photo: Emilio Morenatti / AP / dpa

A: While the recovery in Germany could go relatively fast, in Spain it is dragging on. The Federal Republic could reach the pre-crisis level by the end of 2021, in Spain this should be the earliest in 2023. This has consequences. Because the more and longer people are unemployed, the greater the long-term damage to the country. Jobs usually return at some point – but it takes too long. Too many unemployed people have lost their skills and lost contact with their previous occupations. There is a correspondingly high risk that they will remain unemployed even if the economy recovers.

“The pandemic has widened structural disparities between the north and south of the eurozone,” Lena Komileva, chief economist at G + Economics, told the Financial Times recently. In particular, she emphasized the implications for monetary policy. As the more the eurozone countries diverge, the more difficult it will be for the ECB to find a monetary policy that suits everyone. At present, this is not a problem – the central bank remains in crisis. However, ending this at the right time is difficult in such a diverse euro area.

Many countries do not have financial freedom

Then there are the traces that such a crisis leaves in public finances. The greater the economic downturn and the longer the recovery lasts, the more the burden on the state: it lacks tax revenues and urgently needs to spend more money to stimulate the economy. In Europe, Italy and Greece in particular will have a problem, where the national debt could rise to 160 and 196 percent of economic power, respectively, this year. By comparison, Germany is doing relatively well, rising to 80 percent of gross domestic product. The Federal Republic of Germany has a correspondingly large degree of freedom – and the ability of countries such as Italy or Greece to act is limited accordingly.

Memories of May: Back in Rome it was so empty Photo: Alessandra Tarantino / AP / dpa

And their situation could worsen if the economic crisis was accompanied by a financial crisis. On the one hand, this danger arises when many companies go bankrupt and banks will no longer be able to cope with loan defaults. On the other hand, this can also happen if financial houses hold a particularly large amount of government bonds from their own country and are suddenly worthless. This is not a problem in Germany or France, where banks hold only limited federal deeds. It looks different in Spain or Portugal, where banks hold about 20 percent of government bonds. According to the rating agency Standard & Poor’s, the share in Eastern Europe is even around 50 percent. If banks then have to write off a large part of government bonds, it could throw institutions into crisis. This in turn burdens companies that can no longer obtain credit. The crisis is deepening. Experts call it the “Doom Loop”.

Decision-makers such as ECB chief Lagarde do not yet want to paint such a scenario on the wall. He would rather try advice: promote start-ups, invest public money in areas such as climate and digitalisation, and invest in workforce training. Lagarde is convinced: “Then new companies and new jobs will appear.”

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