Economic indicators, published on Friday, suggest that Europe’s recovery gathered pace in July. Purchasing managers’ indices pointed to a sharp rebound in activity both on the continent and in the UK: British and eurozone businesses reported the fastest growth for more than two years. UK retail sales figures too, suggested June’s spending was only marginally down on its level before the pandemic. The data follows other encouraging figures for Europe; May’s eurozone retail sales were only 5 per cent off the pre-pandemic level.
There should be no complacency about the recovery. The PMIs might be misleading: readings in June, which showed continued declines in output despite easing of lockdown measures, led many economists to question the utility of the surveys at such an unusual time. Rises in retail sales may also represent pent-up demand that will soon fall away. UK consumers may have been spending in shops what they would otherwise have spent at restaurants or hairdressers; overall consumer spending may not have recovered.
So far, however, the data seem to vindicate the idea that if you get the public health response right, the economics will follow. Europe’s heartening figures contrast with the US where the recovery appears to have stalled as infections have begun rising again. Europe’s stricter lockdowns, which were not relaxed until much later, have so far stopped the virus in its tracks, allowing more normal economic activity to resume — at least for now.
Europe’s political leaders also deserve plaudits for being willing to put aside past taboos, whether through Germany’s sizeable fiscal stimulus, selling mutual debt to finance the EU recovery fund or the UK’s swift adoption of a furlough scheme. The euro reached its highest level since 2018 last week after the recovery fund was agreed. Italy’s 10-year borrowing costs fell to lows last seen in February. ECB president Christine Lagarde’s remarks that it was not the central bank’s job to “close the spread” in eurozone borrowing costs seem a long time ago.
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The greatest risk to Europe’s economic recovery is a new, uncontrolled rise in coronavirus cases. Many countries have already reintroduced restrictions on travel from Spain, where three provinces are seeing a spike in cases. Unsettling increases are being seen in south-eastern Europe, too, including within the EU in Romania and Bulgaria. Balkan countries outside the bloc including Albania, North Macedonia and Moldova are among the most concerning.
Winter is another reason for Europe to avoid triumphalism. It will not take much for governments to reimpose strict lockdowns with all their associated costs. These might be more localised and targeted than during the first wave but Europe’s economy is not evenly distributed; northern Italy, already one of the most affected parts of the world, and currently locked-down Catalonia contain much of their countries’ respective productive capacity. Shutdowns in London, Paris or Bavaria would have global effects.
Even if the level of economic activity recovers, the structure of economies may permanently change. Retail sales in the UK may have bounced back but more purchases are being made online and away from city centres. European economies may be swept by bankruptcies and job losses as the bill for the lockdown comes due. Policymakers will have to ensure the shifts to homeworking and online shopping do not lead to mass unemployment and some areas being left behind by the economic transformations. Early signs are encouraging, but there is still a long way for Europe to go.
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