policy measures of individual Member States, a strong need exists for a common, mutually reinforcing EU response to the crisis. European economies are strongly interconnected and a shock experienced in any member spreads to the rest of the European Union through labour movements, value chains, terms of trade and external demand. These spillovers can be fairly significant. In addition to the direct impact of the crisis, a 1% change in the GDP of Germany, France, Italy and Spain results in a further indirect change in the euro area’s GDP of 0.25%, 0.2%, 0.1% and 0.1 % respectively, merely on account of trade spillovers in the euro area (ECB, 2013).
Similarly, a positive shock in any EU country triggers favourable effects throughout the European Union. The impact of EIB loans is a good illustration of how interdependent EU economies are. Macroeconomic modelling by the Economics Department of the EIB Group together with the Joint Research Centre of the European Commission shows that, in the long run, indirect effects can be substantial. Cross-country spillovers in the European Union explain, on average, 40% of the impact of EIB investment on jobs and GDP in EU members. While smaller and more integrated countries gain more in relative terms, large EU countries also benefit greatly from positive spillover effects. In Germany, for instance, spillover effects account for more than 30% of the total impact of EIB investment on jobs (EIB, 2018).
Latest developments in the real European economy
EU GDP shrank massively in the first half of 2020
Growth in most EU economies slowed in 2019, especially in the second half of the year (Figure 8a). Slowing exports and a drawing down of inventories dragged down growth in real GDP in a majority of EU Member States. Declining international trade throughout the year, the result of intensifying trade tensions between the United States and its key trading partners, was the most likely reason (UNCTAD, 2020a). The US economy was affected by these developments too, but growth there remained well above the European Union’s because of a strong increase in private consumption (Figure 8b).
Figure 8
Real GDP and contribution of aggregate demand (% change vs. the same quarter in the previous year)
Source: Eurostat, OECD national accounts and EIB staff calculations.
Note: Data for Q3 2020 are preliminary: Eurostat flash estimate for the European Union, and US Department of Commerce advance estimate for the United States. No breakdown of the components of aggregate demand components is provided GFCF stands for gross fixed capital formation.
In the European Union, the impact of the pandemic was already evident in the first quarter of 2020. Although sweeping measures to contain the spread of the coronavirus were introduced in the last two weeks of the first quarter, consumer spending and net exports declined significantly, causing a drop in real GDP in almost all EU members, particularly in Southern and in Western and Northern Europe. Nearly all EU members restricted the non-essential movement of people and closed most shops, along with schools and national borders, mid-March. Gatherings with people outside the household were also restricted. In most countries, the harshest measures lasted throughout April and for much of May. Figure 9 plots a stringency index of the measures taken by EU governments.
Figure 9
Stringency of government measures across the European Union
Source: Oxford COVID-19 Government Response Tracker, Blavatnik School of Government.
Real GDP fell precipitously in the second quarter of 2020, as economic activity was stifled by government restrictions across the European Union (Figure 9). The overall decline in real GDP in the European Union was more than 11% relative to the first quarter of 2020 and was the largest decrease in a single quarter on record. The falloff was clearly caused by government measures to contain the spread of the virus, and the decline varied widely across Member States. It was smallest, on average, in Central and Eastern Europe where real GDP in the second quarter fell by 9.7% relative to the first quarter. In Western and Northern Europe, it fell by 11.5%, while in Southern Europe the decline was nearly 15%. By way of comparison, the decline of real GDP in the United States in the second quarter was about 9%, compared to the first quarter.
EU GDP increased 13% in the third quarter of 2020 compared to the second quarter, recovering some of its losses. This increase is not surprising as most EU governments relaxed restrictions on movement and economic activity substantially in the third quarter. The biggest increases were in France, Spain and Italy, where GDP had declined by more than the EU average. While substantial, the increase in the third quarter still left EU real GDP 4% lower than the level in the same period a year earlier.
Significant declines in private consumption drove the decline in real GDP in the second quarter (Figure 10). Constrained private consumption accounted, on average, for about two-thirds of the total decline in GDP. Lower consumption represented around one-third or less of the total decline in only four countries.[2] In addition to the restrictions on shopping, private consumption most likely declined because many workers were uncertain about their jobs. In the European Commission’s Business and Consumer surveys, measures – such as unemployment expectations or respondents’ expectations for their financial situation in the next 12 months – indicated consumer anxiety (Figure 11a).
The decline in investment was the second largest cause of the overall contraction in the European Union’s GDP. Investment accounted for about one-third of the decrease, compared with only 14% in the United States. Within the European Union, the depth of the decline varied widely, ranging from just below 2% in Finland to 50% in Luxembourg. In general, the contribution of investment to the fall in GDP was higher in Western and Northern Europe (34%) than in Southern (21%) and Central and Eastern Europe (19%). Uncertainty is very likely to have played a larger role in the contraction in investment than government restrictions. Chapter 2 provides a more in-depth analysis of this drop in investment.
Figure 10
Real GDP change in H1 2020 and contribution of aggregate demand (percentage change in Q2 2020 vs. Q4 2019)
Source: Eurostat, OECD national accounts and EIB staff calculations.
Note: Other includes government consumption expenditure, net export and change in inventories.
Figure 11
Consumer expectations for the next 12 months and real disposable income per capita
Source: European Commission’s Business and Consumer Surveys and Eurostat.
Expectations about future consumption do not suggest a rapid recovery in GDP (Figure 11a). Consumers’ expectations about their financial situation and their willingness to make major purchases in the next 12 months improved to some extent in June and July. Those expectations stabilised in August and September, but they were well below levels seen before the pandemic. The expectations started to deteriorate again in October as the pandemic intensified again across EU members. Disposable income per capita fell sharply in the second quarter of 2020, and this decline will affect consumer spending, especially for lower-income, liquidity-constrained households (