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May 18, 2020

Why this won't be a symmetric shock

The first Covid-19 outbreak seems to be subsiding, but the epidemic is far from running its course. Regardless of government-enforced containment, individuals and firms are likely to change their behaviour to reduce contagion risk. And this will have implications for economic activity. Some economic sectors such as tourism or retail will be affected more strongly and for longer. And this will have an impact on employment. Not every country or region in Europe is equally exposed to these developments. A short paper in the latest BIS bulletin concludes that the unemployment risk from Covid-19, by region in the EU, is highest in France and the Mediterranean countries, lowest in northern Europe, and intermediate in eastern Europe. 

Sebastian Doerr and Leonardo Gambacorta use two factors to estimate their employment risk index: the first category includes exposure to trade, transportation, food, leisure, and household work; the second is the share of firms under 10 employees. Neither correlate well with their indicator variable of google searches for unemployment, but the combination of the two does. Having fewer small firms seems to protect countries like Germany and especially the UK in this case.

It is interesting to compare the estimated risk with the severity of the current outbreak. Italy, Spain, and the UK have had bad outbreaks and are estimated to be highly exposed on the basis of economic sectors, whereas France has been hit by the epidemic but isn't so exposed on the basis of economic activity. France is economically vulnerable because of its high share of small firms. Generally speaking, though, the economic sector factor seems to correlate with vulnerability to outbreaks. It looks like this crisis won't end up being a symmetric shock after all.

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May 18, 2020

Towards a new cold war

The pandemic could have been a moment to reunite former enemies to combat the virus. Dominique Moïsi regrets in Les Échos that, instead, it has accelerated geopolitical divisions and given rise to a new cold war between China and the US. Europe is caught in the middle. 

After its initial silence about the virus spread and faced with the incoherent American response, China chose to attack as the best way to defend itself. Rolling out propaganda on all levels, sending masks and medical support to the world, and at the same time taking a tough diplomatic stance against the west, its strategy is reminiscent of foreign policy under Mao. China has chosen provocation and arrogance to mask a deep worry about their economy in the aftermath of the pandemic. Will their model of an authoritarian political system combined with a capitalist economy still work in times of economic weakness and mass unemployment?

The US is doubling down, too. Donald Trump is going into an general election campaign with his threat to cut off the relationship with China. To portray the virus as something that comes from outside the US conveniently deviates attention away from his own failures. 

And where is Europe in all this? Now that the main protagonists have been cast, Europe will be the object rather than subject in this new cold-war standoff. The declared aim of the Chinese authorities is to split the US and the Europeans, as well as the Europeans among themselves. The US wants to keep Europe in its camp, but won't do anything for it. Europe will be tempted not to choose. The choices are an America under Trump which no longer embodies the values of the old transatlantic Alliance, and a China that no longer hides its intentions. Expect tensions also among European countries which will loom over internal debates about 5G, or about China's strategic investments in eastern and southern European countries under its belt-and-road initiative.

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