Vaccine delays and skimpy stimulus are holding back Europe’s recovery

The United Kingdom is banking on a rapid vaccine rollout to bring its economy back to life this summer, while the United States is pinning its recovery hopes on another giant stimulus package. Europe won’t have either, and it could be left behind.

The European Union’s vaccination campaign has been plagued by manufacturing delays, supply shortages and distribution challenges, making it difficult for policymakers to plot clear paths out of economically damaging lockdowns. While restrictions are gradually easing in some countries, others are leaning towards extending curbs as cases and hospitalizations remain stubbornly high.

Meanwhile, relatively limited government spending and a heavy reliance on tourism in some EU economies promise to further damage the strength of the recovery.

“We will get a rebound [in Europe], but it will be later and somewhat weaker than elsewhere,” said Carsten Brzeski, global head of research at ING. Europe’s economy will likely return to its pre-crisis level only in early 2023 — six months to a year behind the United States, he added.

Vaccine delays

Following strong growth in the third quarter, Europe’s economy contracted again in the final three months of last year after governments reimposed lockdowns to respond to spikes in coronavirus cases and deaths. Many of those measures remain in place, increasing the likelihood of another rough quarter to start 2021.

“The near-term outlook for the European economy looks weaker than expected last autumn, as the pandemic has tightened its grip on the continent,” the European Commission said in a report last month in which it cut its growth forecast for the EU economy this year to 3.7%, from 4.1% in November.

“The question is now how quickly the vaccine can be rolled out, and at what point restrictions can be loosened,” it added.

The 27 countries that make up the European Union, as well as Iceland, Lichtenstein and Norway, have collectively administered nearly 31 million vaccine doses, covering roughly 6% of the population, according to the European Centre for Disease Prevention and Control.

In comparison, more than 20 million Brits had received a first dose as at February 27, or about 30% of the UK population, government figures show. In the United States, 15% of the population has received at least one dose, according to the Centers for Disease Control and Prevention.

“The rollout of coronavirus vaccines is key to the economic outlook across all major economies,” said Sam Miley, an economist at the London-based Centre for Economics and Business Research.

The European Union expects deliveries to pick up in the second quarter and still aims to have at least 70% of its adult population vaccinated by the end of summer, which could help spur a strong rebound in the second half of 2021.

An initial reading of the Purchasing Managers’ Index (PMI), which tracks activity in manufacturing and services, shows that business sentiment in the 19 countries that use the euro rose to its highest level last month in almost three years on optimism over vaccines.

But the shaky start to the vaccination program could have an enduring impact, because the longer restrictions are kept in place the more lasting the damage becomes. This can be seen in jobs data: employment across the eurozone fell for a twelfth straight month in February, according to data provider IHS Markit.

There is also a risk that the crisis leaves “deeper scars in the EU’s economic and social fabric, notably through widespread bankruptcies and job losses,” the Commission said. “This would also hurt the financial sector, increase long-term unemployment and worsen inequalities.”

Tourism still crippled

While a possible increase in the pace of vaccinations and warmer weather will likely pave the way for fewer domestic restrictions by the summer, worries over new variants could lead governments to keep some international travel restrictions in place for longer.

That will deal a heavy blow to countries in southern Europe that depend on tourism such as Spain, Portugal, Italy and Greece, whose economies have already been ravaged by travel restrictions.

“Whereas two months ago it was looking cautiously optimistic that Spain could have a semi normal summer tourism season, I don’t think that’s on the cards at all,” said David Oxley, senior Europe economist at Capital Economics. “A second lost summer for Spain would be very damaging,” he told CNN Business.

It also risks deepening the economic, social and fiscal divides between these countries and Europe’s wealthier northern states, which is frequently the cause of tension within the bloc.

“Should tourism experience another lost year, the damage to the [economies of Portugal, Spain, Italy and Greece] would widen the GDP gap with the core eurozone countries,” Maddalena Martini, an economist at Oxford Economics, wrote in a research note last week.

“We don’t expect a full recovery of services exports, including tourism, to pre-crisis levels until at least early 2023,” Martini added.

Inadequate stimulus

When the pandemic exploded in Europe last March, the European Central Bank and national governments won plaudits for acting quickly to backstop financial markets and prop up their economies.

Trillions of dollars worth of bond purchases and loan guarantees cushioned the blow to businesses and workers, preventing unemployment from spiking to levels seen in the United States.

But given the size of the contraction, stimulus measures since have not been large enough to jumpstart a speedy recovery. Instead, economists say they’ve just done enough to prevent the economy from falling off a cliff.

Additional spending over and above loans and guarantees ranges from 4% of GDP in Spain to 11% in Germany, Europe’s largest economy, according to the International Monetary Fund. In contrast, fiscal stimulus in the United Kingdom amounts to over 16% of the economy and in the United States it’s closer to 17% of GDP, a number that would increase to 25% if Biden’s $1.9 trillion stimulus package is approved.

While the rollout of the European Union’s historic €800 billion ($961 billion) relief package in the second half of this year, which is not included in the IMF figures, could provide a welcome boost to the bloc, it is unlikely to be a game changer, according to Brzeski of ING. These funds will be released over several years and won’t make a massive difference to the hardest hit countries, he added.

“The scale of fiscal support in the eurozone is simply not in the same league as that of the US,” Capital Economics chief economist Neil Shearing wrote in a note this week.

There’s also the risk that the European Union tightens fiscal rules too quickly, which would weaken support for incomes — a move that ECB President Christine Lagarde has cautioned against.

“I would see this in phases,” said Brzeski. “The short term risk [for Europe] is the vaccine, the longer term risk is fiscal policy.”