RaboResearch - Economic Research

Dit artikel is ook beschikbaar in het Nederlands

Covid-19 paralyzes Eurozone economy: Lockdowns lead to very large contractions


  • The lockdown currently in force in most European countries has dire economic consequences
  • Sentiment indicators suggest a sharp contraction of economic activity, most heavily in southern member states and the service sector
  • If the lockdown ends on June first we project a contraction of 5.2% for the Eurozone. If the lockdown is extended till August first, we project a contraction of 12.0%
  • Lockdowns lead to significant employment destruction, but short-time working schemes should help mitigate the impact on unemployment
  • Largescale support packages and deep economic contraction will worsen public finances significantly. Hence, several member states are asking for hotly debated European support

Europe in lockdown

The Eurozone is in lockdown. Hotels, restaurants and retail stores are shut all over the Eurozone, while social distancing commandments imply productivity has taken a nosedive. Fewer blue-collar workers can work in a factory at the same time, while white-collar workers are bound to work from home – while teaching and entertaining their children at the same time. It is clear the economic impact will be huge, especially for the retail and hospitality sector – which have a larger weight in consumption and the economy in southern member states (figures 1 and 2). Just how huge will depend on how long lockdown measures will be in place. In order to project by how much economic activity will be dented we have drawn up two scenarios, one in which lockdowns in the Eurozone will be (gradually) lifted on June first – our baseline - and one by August first.

Figure 1: 40% of Eurozone consumer spending heavily impacted by containment measures
Figure 1: 40% of Eurozone consumer spending heavily impacted by containment measuresSource: Macrobond, RaboResearch calculations.
Note: Hit consumption with limited pent-up potential includes hospitality, recreation, transport and personal care. Hit consumption with (partial) pent-up potential includes clothing and housing equipment.
Figure 2: Hospitality and recreational activities are more important for southern economies
Figure 2:  Hospitality and recreational activities are more important for southern economiesSource: Macrobond, RaboResearch calculations

What we can see in the data so far

The bulk of the available hard data does yet not fully include or capture the effects of the lockdown, since the majority of data refers to February or even January. But more timely sentiment data suggests the economy is contracting big time. Sentiment has imploded across sectors and countries with southern member states and the service sector seeing the most severe declines (figures 3 and 4).

Figure 3: The Purchase Managers’ indices hint at a very sharp contraction
Figure 3: The Purchase Managers’ indices hint at a very sharp contractionSource: Macrobond, Markit
Figure 4: With activity in the service sector at an all-time low – Eurozone average
Figure 4: With activity in the service sector at an all-time low – Eurozone averageSource: Macrobond, Markit

The EU’s services sector experienced the largest monthly drop in business expectations for the coming quarter since records began in 1996, with a 23 percentage point fall. For certain sectors, such as restaurants and retail– which tend to be under-represented in these surveys, things are likely to be even significantly worse. Furthermore, part of sentiment data was collected prior to the latest lockdown measures, suggesting April figures will show a further deterioration.

The drop in sentiment was widespread geographically. Although falls were steeper in Southern member states due to their relatively large tourism sectors and more severe lockdown measures: Germany recorded a drop of 30 percentage points and Italy of 44 percentage points.

Figure 5: March car sales data points to unprecedented slump in consumer spending
Figure 5: March car sales data points to unprecedented slump in consumer spending Source: Macrobond, Spanish, German and Italian car associations

Consumer confidence also recorded the largest drop on record and it seems to be just a matter of time before it will also reach previous crises lows in level terms – currently consumers are still less pessimistic than during the Eurozone debt or global financial crisis. Moreover, passenger car registrations, usually a good predictor of retail sales, have shown an unprecedented contraction (figure 5), suggesting a significant contraction in overall retail sales.

Macroeconomic projections

Baseline scenario

Our base case is at the same time our most optimistic scenario. In our baseline scenario we assume that in the second quarter economic activity in the Eurozone is severely hampered by domestic lockdown measures. More specifically, we expect that most lockdown measures currently in place in Eurozone member states – such as the closure of restaurants and social distancing commandments - will only be (gradually) lifted from the beginning of June. The additional specific ban on non-essential production currently only in place in Italy and Spain is not envisaged for other countries and is expected to be lifted in those countries from end April – other measures will remain in place until end May.

On top of domestic supply side shocks, foreign supply shocks hamper domestic production via supply chain disruptions. Car factories around Europe, for example, have been largely closed for weeks already due to a lack of available parts. Furthermore, economic activity will be significantly dented through an extreme foreign demand fallout and lower domestic demand on the back of higher uncertainty, rising unemployment and defaults. Against this backdrop, there will be much weaker economic activity in the first half of this year in virtually all sectors. But damage will be largest in certain service sectors, such as hospitality and recreation. Announced fiscal and monetary stimulus measures will not prevent a crisis, but support packages should help preventing even worse and support the recovery from the second half of this year.

Figure 6: Contraction set to be larger than during the Global Financial Crisis
Figure 6: Contraction set to be larger than during the Global Financial Crisis  Source: Macrobond, RaboResearch

We assume that lockdown measures will be (gradually or stepwise) lifted all over the world by the end of the second quarter, which gives room for a gradual recovery from the third quarter. We forecast the Eurozone economy to contract by 5.2% this year and to grow with 4.3% next year. Hence the dip is larger than during the Global Financial Crisis, but so is the recovery. 

Figure 7: GDP shows a sharper contraction vis-à-vis the GFC but we project a larger rebound close to previously forecasted levels
Figure 7: GDP shows a sharper contraction vis-à-vis the GFC but we project a larger rebound close to previously forecasted levelsSource: RaboResearch, National Statistics Offices.
Note: The graph shows our current GDP level forecast compared to our GDP level projections pre-dating the corona outbreak.

Since a lockdown of the economy results in a sudden and concentrated contraction, we project sharper GDP contractions than seen during the Global Financial Crisis (GFC). On the upside, we expect the economy to rebound faster than during the GFC as well. If governments are able to prevent large-scale bankruptcies, layoffs and defaults during the lockdown, the economy can more or less go back to normal once the lockdown has been lifted. We say, ‘more or less’, because certain measures to prevent new outbreaks may have to stay in place until a vaccine or other more permanent solution has been found. Clearly, the longer the lockdown lasts - or the more severe the measures - and the less fiscal firepower governments have, the larger the permanent damage to the economy will be: otherwise healthy businesses may not have survived and investments have been delayed or called off.

We believe that Germany and France will be back on their feet faster than Spain and Italy. Both because of more economically damaging containment measures in the first half of this year in the latter two and a larger subsequent domestic demand fallout due to a variety of reasons – among which a bigger impact stemming from labour market structure (i.e. use of temporary contracts, figure 8) and weaker government finances to counteract the economic fallout.

Downside risk scenario: Extended lockdown

There is no guarantee that the lockdown will be lifted on June first. If the lockdown does not result in a quick decrease in the number of new patients, governments could extend the lockdown to prevent healthcare systems from overloading and to buy time to find a vaccine. Sectors such as the tourism, event and retail sector will be largely closed for longer, while the subsequent demand shock will be larger as well if the lockdown is extended. In this scenario companies will minimize investments and R&D activity in order to preserve cash for running day-to-day business, while governments will ramp up investments to keep the economy from falling apart.

Table 1: Projections for 2020 GDP growth in Eurozone countries under the baseline and risk scenario
Table 1: Projections for 2020 GDP growth in Eurozone countries under the baseline and risk scenarioSource: RaboResearch

For additional background information on the assumptions made see this article.

Impact on unemployment

The corona crisis is already translating into destruction of employment. For most Eurozone countries we do not yet have official labour market data for March, but we do know that many firms have already applied for support via short-time work schemes. In most countries companies can send their employees home temporarily, while the state (partly) compensates those workers’ income. Firms will have to put these employees back on the payroll after a certain amount of time or once the crisis is over – variating per country. These schemes should dampen the impact on unemployment and consumer demand fallout, although its impact is uncertain and will likely vary substantially per country, depending on the depth of the crisis, the ease with which people can get fired, and the length and size of government support measures. In this respect we would expect to see unemployment rise fastest in Spain (figure 8) - in the second half of March no less than 3%-points of employment got destructed, apart from applications for the country’s short-time work scheme.

We believe that in the Eurozone as whole unemployment will rise over the current quarters, to average 9% in 2020 as a whole, compared to 7.5% in 2019. Which implies that the rise in unemployment (from trough to peak) is likely to be less pronounced than in 2008-2012.  Importantly, even if employees do not enter official unemployment statistics, they are likely to cut back spending to some extent if they are placed in short-time work schemes. This is because of uncertainty if their company will survive and because of the fact that they will receive between 60% and 100% of their original salary, depending on the country.

Short-term work schemes

Demand for short-time working schemes is high. Almost 500.000 companies have applied for ‘Kurzarbeit’ in Germany and the French ministry of labor stated that 4 million workers (14% of employees) are now covered by the partial unemployment scheme. This is a multiple of the 275.000 workers covered during the height of the financial crisis.

In Spain, 620.000 workers had entered the country’s short-time work scheme ERTE by 2 April, according to the country’s labour minister. Which is about 3% of the labour force. But much data was still missing and estimates for total take out point to over 2 million workers.

In Italy, layoff procedures have been suspended until mid-May, but companies can apply for
wage compensation for employees if they are temporarily redundant. By 3 April, applications were filed for over 3.1 million workers, i.e. about 13% of employed persons.

So it goes without saying that unemployment rates would already have spiked much more significantly without these short-time work schemes.

Figure 8: Southern-Europe has more workers with vulnerable contract types
Figure 8: Southern-Europe has more workers with vulnerable contract typesSource: Macrobond, Eurostat (2018), RaboResearch
Figure 9: Unemployment in the Eurozone has steadily declined over the past years but an increase is now imminent
Figure 9: Unemployment in the Eurozone has steadily declined over the past years but an increase is now imminentSource: Macrobond, Eurostat


In order to help national governments to finance the measures to preserve employment, the European Commission has proposed a plan to raise EUR 80bn to EUR 100bn on financial markets for a fund called SURE: Support to mitigate Unemployment Risks in an Emergency. This money should be raised by using the collateral of unallocated EU funds and also by at least EUR 25bn guarantees from individual member states. National governments would be able to  apply for loans from this fund, with a maximum of EUR 20bn per country, at very reasonable rates to pay for short-time work schemes and related measures. This way, the European Commission wants to ensure that there is no preventable damage to the labor market. Some northern member states have stated they only want to consider this solution if it is made explicit that the fund is temporary. 

Debt sustainability

In order to dampen the shock of the sudden demand and supply fallout governments have produced an arsenal of fiscal measures. These measures range from liquidity support to tax breaks to the earlier mentioned partial unemployment schemes. These are costly measures (table 2). And since countries such as Italy, France and Spain are already testing the limits of the Sustainable Growth Pact (SGP), this could lead to political unrest. Although Brussels has temporarily suspended the budget rules of the SGP for as long as the crisis lasts, the support programmes will put additional pressure on the sustainability of debt in the longer run, especially whilst some countries, Italy in particular, have already shown poor economic performance in the past. It is therefore no surprise that Italy, along with 8 other member states has called for coronabonds, or so-called ‘European health bonds’.

Table 2: Southern Europe has little fiscal space
Table 2: Southern Europe has little fiscal spaceSource: ECFIN, Macrobond, RaboResearch.
Note: *Figures for 2020 are estimated by RaboResearch based on fiscal support, historical data and economic projections.


These bonds are basically a restrained version of the Eurobonds with a clear mandate. The bonds are called into life to ‘target the health emergency we are facing’, i.e. finance the costs governments make combat the effects of COVID-19. Since the bonds would be issued by an European institution, such as the ESM or EIB, the rating of these bonds would reflect the credit worthiness of the European Union as a whole rather than the rating of individual member states. This would essentially eradicate the problem of peripheral spreads. But the topic is hotly debated since some member states argue that this takes away the external incentive from the markets for countries to manage their debt levels. Since it would mainly be the southern member states who benefit from the mutualisation of debt issuance, this reignites the North-South divide within the Eurozone.

European Stability Mechanism

Another option for countries that have a hard time raising funding at capital markets or raising capital at unreasonable costs would be to ask for support from the European Stability Mechanism (ESM). The bloc’s bailout fund of EUR 500bn, could be used to grant the so-called Enhanced Conditions Credit Lines (ECCL) to member states, providing the necessary funding. According to the statutes, these lines would come with large conditionality, though, which southern member states are currently unwilling to accept and northern member states are unwilling to leave out.

To conclude

For now we assume that other avenues than debt mutualisation (which circumvent the more ‘permanent’ liability sharing issue) will be used to finance programmes. This may include ESM credit lines (with eased conditions) and additional room in the EU budget (and/or initiatives such as the SURE fund). As this article ‘goes to press’, Eurozone finance ministers have not been able to find common ground. Yet given the severity of the crisis, it seems reasonable to believe that at some point some compromise should be able to be reached. Although more market pressure is likely necessary to force Eurozone members into more lasting solutions. Or, as our Rates Strategy colleagues have put it – ‘things have to get worse before they get better’.

Maartje Wijffelaars
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 2257 0569
Erik-Jan van Harn
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 3002 0936
Elwin de Groot
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 1389 2916

naar boven