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17J.Sapir1
IS EUROZONE ACCUMULATING AN HISTORIC LAG TOWARD ASIA IN THE
COVID-19 CONTEXT?2
The COVID-19 epidemic is affecting the global economy since early 2020. This pandemy has hit countries and shaken the global economy as it has not actually recovered from the financial crisis of the years 2008-2010.
The process of economic de-globalization accelerated in recent years. It began to manifest openly with the 2008-2010 crisis. In fact, it is from this crisis that we can date a breaking point in the various statistical data. This does not mean that the tendencies towards this de-globalization did not exist before 2007. However, it took this global financial crisis, which was a crisis of globalization both in its causes and in its unfolding, for these trends to manifest themselves openly. The COVID-19 epidemic therefore broke out in a context that was then marked by fundamental changes. It has hit different countries very unevenly and will also unevenly affect post-COVID-19 recovery trajectories. The COVID-19 could then accelerate significantly trends, which were already perceptible before the pandemy. It will play the role of both revealing and accelerating changes that had been noticeable for ten years now. The shift of the world growth pole from the Atlantic zone (USA-Europe) to the Pacific zone, and more particularly Southeast Asia, seems irreversible today.
Keywords: Covid-19, Deglobalization, Multilateralism, Investment, Europe, Asia.
DOI: 10.37930/1990-9780-2021-1-67-89-102 YflK 330.352
The COVID-19 epidemic has particularly affected the global economy. Coming from China, this epidemic has hit different countries in a close succession. Western Europe and the Eurozone were severely hit by the pandemy. The so-called "2nd wave" is creating havoc in countries that had before quite well managed the 1st wave of spring 2020. Even with the vaccine it is quite probable that economic recovery will be postponed to 2022-2023. Would the Eurozone accumulating an historic lag toward Asia in the pandemy context? Analysis done by end of September 2020, that is before the 2nd epidemic wave struck Europa were already showing that the EU and the Eurozone, as some other advanced economies, fared worse in that context. This 2nd wave would quite probably strengthen this trend.
1 Jacques Sapir, economics professor; Director of Studies at École des Hautes Etudes en Sciences Sociales and Centre d'Étude des Modes d'Industrialisation (France); Associate Professor at Lomonosov Moscow State University; Foreign Member of the Russian Academy of Sciences.
2 Based on the paper delivered at the Joint International Congress Genesis of Noonomy: Scientific and Technological Progress, Diffusion of Ownership, Socialization of Society, Solidarism (December 2-4, 2020).
1. The COVID-19 Shock
With the spreading of the COVID-19 and consequences of the «the Great Lockdown », the world faced a crisis like no other3. There is a subtle link between protective measures taken, like lockdowns, and the impact of the COVID-19 induced recession.
The analysis shows evidence on the association between lockdowns and economic activity over a sample of up to 52 advanced, emerging market, and developing economies. Graph 1 shows the correlation between the stringency of lockdowns during the first half of 2020 and the decline in GDP relative to pre-pandemic forecasts.
Graph 1
Relation between lockdown stringency and GDP forecast error
0,0 -2,0 -4,0 -6,0 -8,0 -10,0
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Source: IMF
Nonetheless, these findings have to be interpreted with some caution given omitted variable concerns that affect cross-country analyses. A number of variables (nature of production, weight of services in the GDP, population density) could alter the ultimate result. The situation can be also clearly seen through sectoral analysis and particularly when looking at industrial and services sector (graph 2 and 3). It is to be noted that China has been affected earlier than other countries, but is recovering now much faster.
It is then quite clear that the COVID-19 pandemy has affected different world economies in very different ways. Differences cannot be explained only by the stringency of sanitary measures and lockdowns. But, what is even more important is the fact that recovery path is to be very different in the coming months
3 https://blogs.imf.org/2020/10/13/a-long-uneven-and-uncertain-ascent/
105 100 95 90 85 80 75 70 65 60
Graph 2
Industrial production and COVID-19 impact
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Source: IMF Graph 3
Retail trade sector ■
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Source: IMF
2. How the European Union and the Eurozone have wavered the COVID-19 pandemy?
Lockdowns have been implemented in different European countries leading to different economic consequences. Quite interestingly on data compiled by the IMF by September 2020 (that is not including the 2nd wave shock), European countries are faring quite worse than non-European ones.
Graph 4
GDP Forecast Error and lockdown stringency: Europe and others
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10 15 20 25 30 35 40 45 50 55 60 65
Lockdown stringency
Source: IMF and CEMI Graph 5
80,0 % 70,0 % 60,0 % 50,0 % 40,0 % 30,0 % 20,0 % 10,0 % 0,0 %
Share of employees and self-employees in monetary compensation
■ Share of employees in monetaiy compensation scheme
0 Share of self-employees in monetary compensation
Eurostat
Quite interestingly in graph 4 no Asian countries (but for India) had a GDP forecast error worse than 10% when 6 European countries had (France, Italy, Greece, Spain, Great-Britain and Portugal).
How European countries have managed this situation? First of all, most countries tried to protect employees and, in some, even self-employees people (graph 5). France certainly was the country that protected most employees. But, she protected not as much self-employees, and this category was certainly hit the hardest by administrative lockdowns. On the contrary, Belgium, Greece, Italy, Spain, Portugal and Germany protected much better self-employees, to the point that in all these countries the share of self-employees in monetary compensation exceeded the share of employees. Actually, in 9 countries the share of self-employees in monetary compensation was equal or superior to 40%. This prove that we had significant differences in the way the welfare-state reacted to the Pandemy, even in countries where the model of welfare state and the level of protection it affords is quite comparable. Another interesting point is what economic sector got the major part of the protection afforded by the State in employees compensation scheme. Here too we can see some important differences among countries. Only 24 of the 27 EU countries have given disaggregated data (graph 6). On these countries, we can see 9 countries (France, Croatia, Cyprus, Belgium, Greece, Italy, Ireland, Spain and Romania), which gave their support in priority to the construction and wholesale retail trade workers. Other countries supported more industrial workers. However, these data are incomplete, as Germany has not provided disaggregated data.
Graph 6
Eurostat
This support was mostly done by March, April and May and protected, at its peak (graph 7), more than 30 millions of worker (employees).
32 000 000
30 000 000
28 000 000
26 000 000
24 000 000
22 000 000
20 000 000
18 000 000
16 000 000
14 000 000
12 000 000
10 000 000
8 000 000
6 000 000
4 000 000
2 000 000
0
Graph 7
Total number of jobs supported by governmental measures
Source: Eurostat
How EU countries have to pay for such massive a social protection is the next question to be asked. As a matter of fact, governments needed a lot of money for two different but interlinked undertaking: first to support people under administrative lockdowns and second to help the economic recovery. Here comes the complicated story of the EU recovery plan4.
On Monday, May 18, 2020, Berlin and Paris proposed a 500 billions stimulus plan, accompanied by a transfer mechanism: the European Union would thus create a common debt. However, this initiative provoked violent reactions from the so-called "frugal 4" countries, namely Austria, the Netherlands, Sweden and Denmark. They have presented very different proposals. The European Union agreed to go into debt to raise these some 500 billion and the countries which would receive this money would not reimburse what they would have received but in proportion to their share in the European budget. It is the European Commission, which will raise this sum on the markets - it represents three and a half times the annual European budget - before redistributing it via the budget to sectors and regions in difficulty, Italy and Spain in the lead. Undoubtedly, it is a mechanism that favours small countries that need a lot of money, but not the big contributors to the budget, like Germany or France. In fact, for some countries, the sums would be almost donations. Also, since what they would repay, if they repay it, would be through the EU budget, the debt burden would not be added to theirs.
The plan was finally adopted in July 2020 and confirmed on November 10, 2020. The European Parliament and the EU countries meeting in the Council reached agreement on the next long-term budget of the EU and NextGenerationEU. The Recovery and Resilience Facility is a cornerstone of NextGenerationEU5. It is endowed with € 672.5 billion in loans
4 https://ec.europa.eu/info/strategy/recovery-plan-europe_fr
5 https://ec.europa.eu/info/business-economy-euro/recovery-coronavirus/recovery-and-resilience-facilityfr
and grants to support reforms and investments undertaken by EU countries. The aim is to mitigate the economic and social consequences of the COVID-19 pandemic and to make European economies better prepared for the challenges posed by ecological and digital transitions and the opportunities that they offer.
For European cohesion and territories (REACT-EU), NextGenerationEU also includes a budget of 47.5 billion euros. This is a new initiative that continues and expands crisis response measures and measures to address the consequences of the crisis6. However, for impressive it seems, this programme is not to be operational before late 2021 or early 2022, a good example of the slow and cumbersome bureaucratic process of the EU. So far it is the European Central Bank who is doing thejob of supporting the Economy. Actually most of the money for support and recovery didn't came from budget.
Graph 8
45,0
How EU countries have supported their economies
S Liquidity support
3 Budget measures: Additional spending or foregone revenues
Source: IMF
The predominance of liquidity support (graph 8) highlighted the European Central Bank role. In the context of the second wave of the COVID-19 pandemic, the European Central Bank (ECB) on Thursday, December 10, devoted its monetary policy meeting to the changes to be made to its action7. The Pandemic emergency purchase program (PEPP) was increased by 500 billion, bringing it to 1,850 billion euros and it will last until March 2022, a distant date to take into account the uncertainty about the deployment schedule of vaccines.
6 https://ec.europa.eu/info/live-work-travel-eu/coronavirus-response/jobs-and-economy-during-coronavirus-pandemic/cohesion-policy-support-measures-coronavirus-response-investment-initiative_fr
7 https://covidl9-economie.banque-france.fr/comprendre/la-bce-recalibre-ses-mesures-face-a-la-persistance-de-la-crise-sanitaire/
This amounts to saying that the ECB is extending its horizon even beyond the health crisis and signalling that it will continue its special pandemic operations beyond the pandemic. This shows that these operations mainly aim to remove the risk of a debt crisis and to facilitate the financing and refinancing of States reassuring investors.
However, one of the problems posed by the ECB's action s that only 25% of its operations have helped Eurozone banks. In fact, ECB helps a bit blindly. Instead of taking targeted actions like a national central bank would do, like the Bank of England, for example, it is watering the market. As a result, the asset buyback program will not help countries out of deflation and have little ripple effect on the real economy. On the other hand, we can fear a strong financial instability in the medium term, given the scale of these programs, and the mass of central liquidity discharged on the markets. The markets are now totally dependent on central bank liquidity. The addiction has become unhealthy.
3. Differences in recovery path and the EU and Eurozone
The European Union and the Eurozone have stalled in relation to the process of economic recovery in Southeast Asia (graph 9). This stall is significant, because it could herald a form of marginalization of the EU and the Eurozone vis-à-vis what is now one of the main centres of global economic growth.
Graph 9
Uneven recoveries
(Year -on-year percent change]
Apr. 2020 J un. 2020 ■ Oct 2020
4 2 0 -2 -4 -6 -8 -10
Advanced Economies Emerging Market and China
Developing Economies excluding China Sources: IMF, and World Economic Outlook. October 2020
From: https://blogs.imf.org/2020/10/13/a-long-uneven-and-uncertain-ascent/
The second wave of the epidemic (fall 2020) is affecting Europe in a particularly strong and spectacular way, and will amplify this phenomenon. It is worth wondering here why countries whose health systems were often given as a reference could not manage this epidemic more adequately.
It could quite profoundly modify the situation of the countries of the European Union and of the Euro zone (EMU)8. The impact on the economy will be considerable and the
8 https://www.lopinion.fr/edition/economie/pib-francais-devrait-se-contracter-ll-en-2020-227896
forecasts drawn up by the IMF at the beginning of October 2020 will necessarily have to be revised. From the revision carried out in November concerning the French economy9, we have here extended the reasoning to the main countries of the Euro zone (graph 10). The gap with what had been anticipated at the beginning of October 2020 is obvious.
Graph 10
Growth forecasts without and with the COVID-19 "2nd wave"
Source: IMF (October 2020) and CEMI
The fact that the health crisis is globally under control in Southeast Asia plays an important role in the trajectory of economic recovery of these countries. This difference in the path of recovery in economic activity also reflects to the strategies for supporting the economy adopted by each country. The interesting point here is not only that the volumes of support, calculated as a percentage of GDP, vary widely, but that there is also a clear difference between countries that support their economies through bank loans and bank shares and those who favour budgetary action, either through direct subsidies or tax cuts.
These data were (graph 11), again, compiled by end September 2020; differences nevertheless are significant. They display different approaches to the issue of fiscal deficits, and for relationship with central banks and in the role left to the latter in economic policy. This translates into significant uncertainties in the levels of economic activity and significant differences between the major economic areas of the world. But an important point is the fact that the EU appears quite low in this graph and that the two main countries of the EU and Eurozone, Germany and France appear even lower. One can wonder if the quality of aid will not be affected, if only indirectly, by the instruments of its financing.
9 Sapir J., «The economic consequences of re-containment on the French economy", paper presented to the French-Russian seminar on Economic Development of Russia, regional session, November 12th, 2020, Paris, CEMI-Fondation Robertde Sorbon.
90,0 % 80,0 % 70,0 % 60,0 % 50,0 % 40,0 % 30,0 % 20,0 % 10,0 % 0,0 %
Graph 11
Budget in percent of total support
IMF
The difference between the recovery trajectories of economic activity in China and the European Union is to be noticed. With this second wave, we will have to expect an even greater difference. Computation of the probable EMU growth rate once the impact of the COVID-19 has been accounted for shows a decrease by at least 1,6% for 2020 and by around 2,6% for 2021. Theses differences also translate into divergences for the coming years. This was already obvious in data computed by the IMF before the second wave (graph 12)
Graph 12 Average GDP rate of growth
10
1 - World
2 — Advanced
Economies
3 — of which
euro area
4— Emerging Market and Developing Economies
5 — Emerging and
Developing Asia
6 - Russia
2002-2011 2012-2019 2020-2022
Source: IMF
As shown in Graph 13, the EMU stall by comparison with other countries group is even more spectacular. It should be noted, however, that this trend already existed before the COVID-19 pandemic.
Graph 13
The Post-Covidl9 world
- ■ - - Major advanced economies
(G7)
— — Other advanced economies
(Advanced economies excluding G7 and euro area]
-----Emerging and developing
Asia
- Middle East and Central Asia
■ Sub-Saharan Africa
—■— EMU (IMF) —*— EMU (revised)
2019 2020 2021 2022 2023 2024 2025
Source: IMF and CEMI
Indeed, the countries of the Euro zone have experienced abnormally low growth compared to other developed economies since 2007, or even since 200010.
Graph 14
Rate of growth since 2007 - Comparison
125 120 115 110 105 100 95 90
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United Kingdom
Norway
- France
-♦— Italy ---Germany
Source: Eurostat
10 Sapir J., Faut-il sortir de l'Euro ?, Paris, Seuil, 2012.
A study carried out by the Center for European Policy (CEP or Centrum für Europäische Politik) of Freiburg (Germany), has caused a lot of talk and writing, whether in France, Germany or even in Brussels11. It shows that the introduction of the Euro made winners and losers and that the introduction of the Euro would have cost since 1999 and until 2017, in cumulative amounts, 3,591 billion Euros to France, 4,325 billion for Italy and 424 billion for Spain, while Germany would have earned 1893 billion euros and the Netherlands 346 billion.
It can be seen that, compared to the OECD average, the euro zone has only grown by 0.5% to 0.7% lower (table).
GDP growth rate at constant prices. Average per period
Average 2001-2011 Average 2001-2007 Average 2007-2011
Australia 3,1% 3,4% 3,1%
Canada 2,1% 2,6% 1,4%
Norway 1,8% 2,3% 1,2%
Sweden 1,8% 3,0% 0,5%
Switzerland 1,7% 2,0% 1,6%
United Kingdom 1,6% 2,6% 0,4%
United States 1,9% 2,4% 1,3%
EMU (Eurozone) 1,1% 1,9% 0,4%
OECD, total 1,8% 2,4% 1,1%
Deviation from the OECD average -0,7% -0,5 -0,7
SOURCES: OECD database. For 2011, estimates. For 2010, provisional figures.
Sources and Methods, (http://www.oecd.org/eco/sources-and-methods). These figures are corrected for the number of working days.
Note: The establishment of the SNA93 and ESA95 systems of national accounts has progressed at an uneven pace between OECD member countries, for the variables and the period covered. As a result, several national series contain breaks. In addition, several countries use chain price indices to calculate real GDP and expenditure components.
From this point of view it is striking to note that, since the introduction of the Euro, the role of Europe on the international economic scene has continued to decrease. However, it should be noted that the impact of national economic policies implemented in the countries of the zone precisely because of the introduction of the single currency have had considerable importance too on the individual trajectory of the countries12.
We can therefore think that the Euro has stifled growth in some of the countries that have adopted it, because of the transfers of wealth that it would have caused. This situation is very evident when we compare the different recovery trajectories of economic activity. As we have seen Eurozone and EU countries have adopted different strategies to face the COVID-19 challenge. These different, and national, strategies look now much more important than the "common" response of the EU Commission. Without the EMU, and the Euro, a logical consequence of these differences would have been depreciation and appreciation of national
11 https://www.dw.com/en/cep-study-germany-gains-most-from-euro-introduction/a-47675856
12 Bibow J. et A. Terzi (eds), (2007) Euroland and the World Economy: Global Player or Global Drag?, New York (NY), Palgrave Macmillan.
currencies. But, because of the Euro, a process of budget subsidization implying a process involving transfers of wealth had to be engineered, and that was exactly what aimed for the July 2020 agreement. However, we could wonder if the sums provided for in this agreement are up to the transfers that these different response strategies to COVID-19 make necessary in a common currency situation. If they aren't, as we actually believe, then the economic consequences on recovery paths notjust for "worse-off' countries but for the Eurozone as a whole are to be very important13. This problem will arise in an acute manner as soon as the European Central Bank begins to reduce its bond purchase programs and the issue of financing policies to support the economy reverts to the top of the government's agenda. The debate on debt cancellation that is currently developing in Italy is an anticipation of the debates to come14. It is then clear that the COVID-19 epidemic will have played the role of both revealing and accelerating changes that had been noticeable for ten years now. The shift of the world growth pole from the Atlantic zone (USA-Europe) to the Pacific zone, and more particularly Southeast Asia, seems irreversible today.
The new division of the world will very likely take place without the Europeans, who remain faithful for the time being to the ideology of «globalization». It doesn't stop at the G-7 door, because both the EU and the Euro deserve to feature prominently here15. From this point of view, it is worth highlighting the extremely harmful consequences of German domination over the European Union, a domination that is expressed both by the standards that this country imposes and by the instruments it controls such as the euro16. The French President of the Republic, Emmanuel Macron, had he not recognized in a rare flash of lucidity that the euro had mainly benefited Germany?17 German policy is, as a matter of fact, destroying the European Union, and with it the idea of European cooperation18, as it could been seen in the tensions that have emerged between the France and Italy but also between Italy, Poland and Hungary and France and Germany.
But, the obvious failure of the G-7 signals too the exhaustion of the "Western model". This confirms a trend, which has been notable since the end of the 2000s19. It is therefore clear that the process of de-globalization is now irreversibly underway20.
Conclusion
If we look at the growth rates as they were estimated before the 2nd wave in Europe, we see that the gap is widening between the developed countries, France, Germany, Japan and the United States of America on one side and China on the other.
13 See, Kelejian, H. & al. (2011), «In the neighbourhood: the trade effects of the euro in a spatial framework », BankofGreece WorkingPapers, 136.
14 https://www.lesechos.fr/monde/europe/les-italiens-revent-deffacer-la-dette-due-au-covid-1268709
15 Voir, Joseph Stiglitz : « Il faudra peut-être abandonner l'euro pour sauver le projet européen », entretient avec Benoît Georges, in Les Echos, 16 septembre 2016.
16 Husson E., Paris-Berlin, La Survie de l'Europe, Paris, Gallimard, 2019.
17 Voir, « Emmanuel Macron in his own words - The French president's interview with The Economist », 7 novembre 2019, https://www.economist.com/europe/2019/ll/07/emmanuel-macron-in-his-own-words-english
18 Cafruny, A, Europe's Twin Crises: The Logic and Tragedy of Contemporary German Power, in Valdai Paper 10, 2015; Ryner, M et Cafruny, A, The EU and Global Capitalism: Origins, Development, Crisis, London: Palgrave, MacMillan, 2017.
19 Sapir J., Le NouveauXXIè Siècle, op.cit..
20 Sapir J., La Démondialisation, Le Seuil, Paris, 2011.
Obviously, with the economic consequences of the re-containment that we have seen in many European countries, this gap will widen even more. Countries, which have managed to partially preserve their economy, such as Germany or the United States, will be less affected than those, which have stopped many activities. But they too will fall significantly behind China, and Southeast Asia overall. The Covid-19 has thus revealed major trends that have been present for more than twenty years.
This translates to two things. On the one hand, the Euro acts as a stifle for growth. On the other hand, the pole of world growth has shifted over time to the Asia-Pacific basin.
Ж. Сапир21. Накапливается ли историческое отставание еврозоны от Азии в контексте Covid-19? С начала 2020 г. наблюдается влияние эпидемии COVID-19 на глобальную экономику. Эта пандемия затронула многие страны и стала потрясением для глобальной экономики, которая еще не успела восстановиться после финансового кризиса 2008-2010 гг. В последние годы ускорился процесс экономической деглобализации. Его первые открытые проявления связаны с кризисом 2008-2010 гг. Фактически в разных статистических данных наступление переломного момента приходится именно на этот кризис. Это не означает, что тенденций к деглобализации не существовало до 2007 г. Однако именно этот глобальный финансовый кризис, который являлся кризисом глобализации как с точки зрения причин его возникновения, так и с точки зрения его протекания, способствовал открытому проявлению данных трендов. Таким образом, эпидемия COVID-19 разразилась в контексте, уже отмеченном наличием фундаментальных изменений. Она крайне неравномерно затронула разные страны, и ее влияние на траектории восстановления после COVID-19 будет столь же неравномерным. COVID-19 мог значительно ускорить тренды, которые прослеживались и до пандемии. COVID-19 будет способствовать выявлению и ускорению изменений, наблюдавшихся в последние десять лет. Смещение мирового полюса роста из зоны Атлантики (США-Европа) в Тихоокеанский регион, в особенности в Юго-Восточную Азию, на данный момент представляется необратимым.
Ключевые слова: COVID-19, деглобализация, мультилатерализм, инвестиции, Европа, Азия.
21 Жак Сапир, профессор экономики, директор по исследованиям Высшей школы социальных наук и Центра исследований моделей индустриализации (Франция), доцент МГУ им. М. В. Ломоносова, иностранный член РАН.
