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Driving forces behind the collapse of the European economy

The economic contraction in the second quarter of 2020 was disastrous for the EU. Eurostat, the statistical office of the EU, reports that the seasonally adjusted GDP decreased by 11.7% in the EU compared to the first quarter of 2020. Of course, this had everything to do with the peak of lockdown restrictions. All European countries had some sort of lockdown during this quarter, but the severity and length of these lockdowns varied a lot across the countries. Spain had one of the strictest lockdowns in Europe, Sweden, on the other hand, used a relative light-touch lockdown and the Netherlands imposed a so-called “intelligent” lockdown.

Now, we see very different GDP growth rates across countries over the second quarter of 2020. Eurostat reports a contraction of the Finnish economy of just 3.2% compared to the last quarter. In comparison, Spain and the United Kingdom had record declines of 18.5% and 20.4%, respectively, compared to the first quarter of 2020. We could link the severity of the lockdowns directly to these large differences in economic contractions. However, is it just about the severity of the lockdowns, or is there more to consider? Two Economics professors at the University of Chicago show that individual choices of people are far more important in explaining the economic contraction compared to the impact of government-imposed restrictions. As such, they show that there are strong ties between the decreases seen in GDP and people’s behavioral changes due to fear of infection.

Different lockdowns in Europe

Let’s first look at the variety of lockdowns imposed by European countries. Sweden had one of the most controversial lockdown strategies, as the country was barely in lockdown. The Swedish government advised people to limit personal contacts and imposed social distancing, but a lot of schools stayed open, as did many businesses. As the government did not enforce a lot of restrictions compared to other countries in Europe, citizens in Sweden did not feel as stressed as they might have if the government had imposed a more stringent lockdown. This touches directly upon the mental health aspect of a lockdown, which is often overlooked by many. However, Sweden did pay the price for having a light lockdown. In Figure 1, we see that Sweden has the third-highest coronavirus cases per 1 million people in Europe. Furthermore, Sweden ranks fifth for the most amount of deaths per 1 million people due to the coronavirus.

Although Sweden was hit hard by the coronavirus given the number of cases and deaths, Sweden’s economic contraction was one of the least severe in Europe. Sweden’s GDP declined by 8.6% in the second quarter of 2020 compared to the first quarter of the year. Unlike many other countries in Europe, their GDP grew in the first quarter of 2020 compared to the quarter before (by  0.1%).

On the other side of the various lockdown strategies is Spain, as they had one of the more stringent lockdowns in Europe. The government only allowed people to leave their homes to buy food and medicine, to take care of vulnerable people, and to go to work, medical centers and banks. Furthermore, Spain closed down everything deemed non-essential. This ranges from restaurants, bars, hotels, and other non-essential retail shops, to schools and universities.

As the lockdown was quite severe in Spain, you would expect a severe hit to their economy. Spain’s GDP declined with 18.5% in the second quarter of 2020 compared to the quarter before. This not only worked through the closing down of shops, but also through the behavioral and mental health impact on citizens and the corresponding decline of consumption. Although the lockdown was quite strict, Spain has the second-highest coronavirus cases per 1 million people in Europe (Figure 1), as well as the second-highest amount of deaths per 1 million people (Figure 2).

Other notable countries are Italy and the United Kingdom. On the 8th of March, Italy became the first European country that restricted movement of people to only essential traveling. Just like the stringent lockdown of Spain, the Italian government used a similar lockdown. Not only was the closing of shops going to damage the economy, but also the Italian economy’s reliance on the tourism industry was around 13% as a share of their GDP. This sector is heavily hit by the coronavirus, which is expected to damage the economy even more if tourists keep avoiding Italy.

Furthermore, horrific headlines in the newspapers on the limited intensive care units (ICUs) may have led to changes in consumption patterns of people. In Figure 1 we can see that Italy is ranked ninth in Europe for the highest amount of coronavirus cases per 1 million people. Still, their number of deaths per 1 million people was the third-highest, as can be seen in Figure 2.

Even though it looked as if the Italian economy was going to be among the worst-hit economies in Europe, the seasonally adjusted GDP decreased by 12.4% in the second quarter of 2020 compared to the quarter before. This contraction is just barely higher than the average economic contractions seen in Europe, and much lower than the GDP decline of the United Kingdom.

The United Kingdom had a seasonally adjusted GDP decline of 20.4% over the second quarter of 2020, compared to the quarter before. This was the largest decline recorded in Europe for the second quarter. This mainly had to do with the length of the lockdown that was imposed, as well as the sharp reduction in consumption expenditure.

Fear of infection leading to an economic collapse

Economics professors Goolsbee and Syverson, from the University of Chicago, show that the government-imposed lockdown is not the main driver behind the economic contractions. Rather,  what is driving the contractions is the voluntary choices of individuals in, for instance, avoiding larger and busier shopping areas. They analyzed cellular phone records data on customer visits to businesses to examine the decline in economic activity. They show that people already started traveling less before there were any restrictions imposed by the government. Goolsbee and Syverson link this decline in traffic to the fear of getting infected by the coronavirus and even to the number of coronavirus deaths. As these numbers increased, consumers moved away from busier stores towards smaller and less busy ones. In their analysis, they report that the government-imposed lockdowns only account for a small share of the change in consumer behavior. They measured a decline in foot traffic of more than 60 percentage points, while the lockdowns only account for around seven percentage points. Thus, most of the decline was due to people themselves choosing to avoid commercial activity, linking the collapse of the economies to fear of infection and to the number of local coronavirus deaths.

Following the evidence of Goolsbee and Syverson, the contraction in the United Kingdom and Spain is much more a consequence of behavioral changes of individuals than the lengthy lockdown in the United Kingdom or the strict lockdown in Spain. In Figure 2, we see that both the United Kingdom and Spain are in the top-3 countries with the most deaths per 1 million people.  Furthermore, Figure 1 shows a relatively high rate of infections in these countries.

However, in Figure 2 we can see that the country with the most deaths per 1 million people, Belgium, has a seasonally adjusted GDP decline similar to the EU average. Hungary, on the other hand, had a devastating economic contraction (top 3 in Europe), as can be seen in Figure 3. This, despite Hungary having a very low amount of coronavirus deaths per 1 million people, as shown in Figure 2. Both the Belgium and Hungary case seems to be contradicting the evidence reported by Goolsbee and Syverson in their analysis.

The examples for Belgium and Hungary show the complexity of pinpointing reasons for massive economic contractions. It is not just the lockdown that led to a shocking collapse of the economy, and it is also not only the behavioral changes of people. Despite it being challenging to explain the large differences in economic contractions in Europe, the insights of professors Goolsbee and Syverson add a small piece to the larger puzzle we are trying to solve. As they show in their analysis, we should not underestimate the behavioral changes of people due to fears of infection and the number of deaths in a country. Choices of individuals themselves may very well be the key driver of economic contraction, while a lockdown is merely a minor factor. This result opens up more possibilities for policymakers if they reintroduce lockdown restrictions, as the impact of lockdowns on the economy seems to be small.


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