Four countries, four ways to recover

The shape of the post-crisis recovery will depend on the characteristics of each economy, the fiscal response and the level of integration in global value chains.

Even before the COVID-19 crisis, some eurozone economies were more vulnerable than others. High levels of debt or unemployment could limit the strength of the recovery.

At a domestic level, the sectoral structure, the pattern of private consumption and the labour market situation will be crucial. A high dependency on tourism, a sector durably impacted by the crisis, could hold back the recovery.

At the external level, a slow recovery in global trade would hit the most open economies. Moreover, the distortions in global value chains during this crisis could weaken the most highly-integrated economies over a longer period.

Contrasting economic starting points

Before the COVID-19 crisis, eurozone member states were in different economic positions, particularly with regards to their public finances and labour markets. From a public finances perspective, level and trend of debt-to-GDP ratios had diverged significantly. Whilst the public debt to GDP ratio has fallen by more than 20 points in Germany between 2010 and 2019 (to 60% of GDP), France experienced a sharp increase of 15 points over the same period (to 98% of GDP). France is also the only major eurozone economy not to have stabilised its debt-to-GDP ratio. Italian debt - structurally higher - was close to 135% of GDP in 2019, whilst the ratio in Spain has fallen steadily since 2014 (from 100.7% in 2014 to 95.5% in 2019).
The COVID-19 crisis will result in a significant increase in government debt in the eurozone, through both a contraction in nominal GDP and a widening in public deficits. This could hold back the recovery. Although the short-term risks are mitigated by the massive intervention of the European Central Bank (ECB), this could lead, over the medium term, to greater vulnerabilities. Rising public debt may result in higher interest rates, due to increased risk premiums, which could, on its turn, limit a fiscal stimulus. Moreover, household may step up their savings in anticipation of higher future taxes.

Specific endogenous features more or less favourable to a strong recovery

Jobs at risk

Significant questions remain concerning the ability of these small companies to overcome the economic crisis, particularly once government support comes to an end. SMEs are the most vulnerable to the current situation, given their weakest cash positions. Small firms often also face more difficulties to benefit from the existing support schemes. In Italy, only one-third of claims from SMEs or employees on short-time working have resulted in a payment so far . Moreover, Italy and Spain are the two countries where the economic contraction could be the greatest in the second quarter of 2020, which would further accentuate the financial difficulties of small companies in these countries.

Forced savings: a guarantee of recovery in consumption?

The resumption of consumer spending will play a key role in the recovery. First and foremost, consumer spending is the most important part of GDP (slightly over 50% for Germany and France, 60% for Italy and Spain). It is also the demand component most likely to recover fast, in particular because of the substantial savings accumulated during the lockdown period. These “forced” savings are the automatic result of a collapse in household consumption, whilst disposable income has been broadly preserved. The European Commission’s spring forecasts evaluate the scale of this forced savings . The Commission expects the household savings rate to rise in 2020 by between 6 and 7 points in Germany, France, Italy, and Spain. This would push the households’ savings rates to 25% in Germany, 22% in France, 17% in Italy and 14% in Spain. It must be added that the EC forecasts include not only forced savings but also precautionary savings.
The question is at what speed and to what extent this forced savings will be unblocked and consumed once the lockdown ends and the economy starts recovering. On one hand, consumers’ purchasing power is likely to benefit from falling oil prices. It was of little help during the lockdown but it represents a significant support for the post-crisis period. However, what matters eventually the most is consumer confidence with regards to both the health risk and the state of the labour market. The scale of the shock on income and on financial wealth will also play a role. For some, the question will not be to what extent they can run down their savings, but how to rebuild them.
The state of the labour market is a key factor as it will determine to what extent households increase their precautionary savings, thereby limiting the expected recovery in consumption. The persistence of the shock on employment and unemployment is hard to assess, but the risk is not negligible. Given the situation before the crisis, the strengths and weaknesses of the labour markets in each country and the measures taken to mitigate the shock, Germany appears less exposed than France, Spain, or Italy. Although the better situation of its labour market plays favourably (assuming it passes the test of the current crisis), the recovery in German consumption could be restrained by the cautiousness of its citizens, compared to French, Italians and Spanish counterparts.

Uncertainty over the shape of the recovery in consumer spending also relates i) to the composition of consumption, ii) the share of spending that has been unaffected by the lockdown (pre-committed spending and food in particular). Among the part that has been affected, we need to differentiate the part that can quickly be caught up, from the part which will take longer to recover, and even the one that has been definitively cancelled. Unfortunately, it is difficult to make any assumptions about future consumption behaviour. Some of the spending affected falls into different categories, such as travel, vehicle purchase or spending on clothes. Some areas could also see a rush effect after the lockdown, producing thus a temporary surge in consumption: this could be true of bars and restaurants, cinemas, and leisure activities in general.

It would be nice to be able to say that the steeper the fall during lockdown, the more vigorous the recovery. The uncertainty surrounding demand, linked with the gradual easing of lockdowns and the social distancing measures will probably mitigate the speed of the rebound. The same is true for construction and industry. These two sectors are more cyclical - steep contractions are usually followed by strong recoveries. But it looks as though it might be harder to restart building sites and factories than to reopen shops: the return to normal in these sectors could therefore be slower, especially given that lockdown measures have been substantial and production capacity has been underutilised. These factors play in favour of Germany, where the lockdown has been less stringent than for the three other countries , whilst French business leaders (across all sectors) seem pessimistic .
In any of these sectors, a rapid recovery could be impeded by labour constraints and hiring difficulties too. Activity is also likely to be held back by increased costs and reduced productivity as a result of ‘barrier’ health protection and social-distancing measures. The productive fabric that underlies the sectoral structure of each economy, its financial solidity, will also matter. Industry will also be affected by the global trade variable and the uncertainty about its recovery, against a background of a possible ‘deglobalisation’ and the necessary ‘greening’ of economies, both trends that could affect this sector.

As a result, it is possible, but by no means certain, that Germany will draw on the power of its export industry to recover faster than its eurozone partners.

Participation in global value chains (GVCs) has been a key driver of the global economy over the last few decades. It has stimulated growth by boosting productivity through increased specialisation. However, it has also made value chains more vulnerable to economic disruption. Shocks in one country are rapidly transmitted to other economies. In the case of the COVID-19 crisis, companies have faced disruption to supply, caused by restrictions on transport and the shutting down of production chains. The scope for recovery will therefore also depend on these being restored.

The weight of value chains

The fall in trade will particularly affect the most open economies. Thus, Germany is likely to be the hardest hit of the eurozone’s major economies. In 2019, its exports of goods and services represented 47% of GDP, a figure much higher than for Spain (35%), Italy (32%) and France (31%; see Figure 8).

Participation in GVCs is often measured in terms of the share of foreign inputs in exports. Figure 9 shows that this share is higher in the smaller countries, making them more sensitive to disruption to GVCs in the current crisis. The involvement in GVCs of a major economy with technology-rich production may be relatively low. Such an economy is capable of producing a sizeable share of value added locally. This explains why in Germany the share of foreign inputs in its exports is relatively low.

In recent decades, the exposure of the German manufacturing sector to the economies of South and East Asia, which includes China, Japan, and South Korea, has increased rapidly. In 2015 (the most recent year for which figures are available), this region represented 20.6% of imports of manufactured goods to Germany, compared to 18.6% for France. Moreover, Germany is one of the biggest exporters to China. In 2015, 7.6% of Chinese imports of manufactured products came from Germany, compared to 2.4% for France, 1.8% for Italy and 0.7% for Spain. As a result, the sharp drop in Chinese industrial activity put the brakes on German manufacturing output.
Given the important role of the German manufacturing sector, this disruption was rapidly transmitted to neighbouring countries. Final demand for manufactured products in France, Italy and Spain contains respectively 9.2%, 6.5% and 6.7% of value added from Germany. This highlights the importance of a recovery in Germany’s manufacturing industry for other European countries. Meanwhile, German industry also depends on demand from its neighbours and imports of essential components from them.
In the short term, the gradual upturn in Chinese industrial activity will be favourable, particularly for German industry. But it will not be enough. European manufacturing sectors will rely to a large extent on a recovery in demand within Europe, which will in turn depend on the lifting of lockdowns and the easing of restrictions.
The COVID-19 crisis has highlighted the vulnerability of GVCs. It is not only the complexity of supply chains that has drawn attention, but also the dependence on China for certain products. In particular, European countries are now questioning the dependence on China for the production of personal protection equipment and certain pharmaceutical products. Thus, the crisis has heightened calls for a repatriation of certain industries. A shortening of value chains would also be welcome from an environmental standpoint.

Turning on the fiscal taps

All governments responded rapidly to the crisis, by introducing a range of sizeable emergency fiscal measures . These measures can be split into those providing a direct fiscal stimulus (short-time working schemes, health investments to cope with the epidemic, exceptional support to companies and the self-employed), and those addressing liquidity and cash flow issues (government loan guarantees, recapitalisations). The direct measures will have a significant impact on the economic recovery over the short and medium term.

This said, on the specific question of short-time working, the Kurzarbeit programme in Germany is less generous, both in terms of the benefit paid and its ceiling. A German worker will receive 60% of its net income (67% if they have dependent children), compared to 84% (70% of gross) in France and 70% of gross income in Spain. The corresponding figure in Italy is 80%, making it the most generous scheme on this measure. With regards to the ceiling, it ranges between EUR 1,098 and EUR 1,400 per month in Spain and Italy, between EUR 2,750 and EUR 2,890 in Germany and at a much higher level of about EUR 5,500 in France (70% of 4.5 times the minimum hourly wage) . In addition, France has by far the highest number of workers enrolled in this scheme. By mid-May, the Labour Ministry had received 12.4 million applications for prior authorisation , equivalent to about 40% of the labour force. Germany recorded 10.1 million of applications at mid-May or 23% of the labour force. There were about 8 million applications in Italy (30.1%) and 3.39 million in Spain (14.7%).

Spain and Italy are the two countries likely to suffer most from this crisis. Their greater dependence on small businesses and tourism, their chronic unemployment and the already very high levels of public debt leave them very vulnerable. France stands in-between. The country shares these handicaps, albeit to a lesser degree. This is also a more resilient economy and should, in this regard, have fewer difficulties to bounce back than Italy and Spain. Germany, both from a structural and fiscal perspective, is better placed to engineer a quicker recovery in the coming months. That said, there is a questions mark about the ability of global trade to help drive German growth, as it did during the financial crisis of 2008. China’s economy is slowing and resurgence in trade tensions between China and the US could have significant repercussions for the German economy.

1 If we widen the scope to companies with up to 249 employees (Eurostat’s definition of an SME), the share of employment is 67% in the EU27, 76.8% in Italy, 71.8% in Spain, 63.2% in Germany and 53.4% in France.

2 Coronavirus : la survie des entreprises italiennes entravée par la bureaucratie [Coronavirus: the survival of Italian companies threatened by bureaucracy], Les Echos, 11 May 2020.

3 European Economic Forecast, Spring 2020, European Commission,

4 “Resilient builders lay foundation for German economy to Outperform”, Financial Times, 14 May 2020.

5 According to a survey of 1,300 French business leaders published by Xerfi in early May, 90% of respondents do not expect to reestablish full production capacity until the summer of 2021 (In French https://www.xerfi.com/flash/COVID19-Enqu%C3%AAte-entrepreneurs.pdf?utm_source=EMAIL_COVID_19_ENQUETE_VIDEO_08052020&utm_medium=email&utm_campaign=%40EMAIL_COVID_19_ENQUETE_VIDEO_080520)

6 This substantial weight should be seen in the context of the large share of domestic tourism: of the 7% of GDP represented by tourism in French GDP, 5 points come from domestic visitors and 2 points from non-residents.

7 For a list of measures taken by each government see EcoFlash “COVID-19: Key measures taken by governments and central banks”, 11 May 2020.

8 https://www.imf.org/en/Publications/FM/Issues/2020/04/06/fiscalmonitor-april-2020

9 See https://www.unedic.org/publications/covid-19-les-differentssystemes-dindemnisation-du-chomage-partiel-en-europe (in French)

10 To be distinguished from actual claims for compensation. According to Unédic preliminary estimates, released on 12 May, 70% of the applications for prior authorisation gave rise to an actual claim for compensation in March.