February 24, 2020
Coronavirus comes to Europe
The non-trivial lessons we have learnt from the coronavirus outbreak includes the following: extreme lockdown measures, such as those in China and now in Italy, are successful in containing the disease. Despite the latest cases, the global spread of the disease has been less than feared initially. Most of the victims abroad either had direct contact with people who contracted the disease in China, or live in local clusters of the disease.
We learn from the South China Morning Post this morning that Guangdong, the southern Chinese province just north of Hong Kong and the second worst hit, has now reduced the health alert level to grade two. Except for the Hubei region, it appears that the spread of the disease is slowing.
In Italy, a dozen towns in the Lombardy and Veneto regions, in the north and north-east of the country, have been put under quarantine. Milan, the capital of Lombardy, has closed down schools. Italian media report that travel in and out of Milan has nearly collapsed. Restaurants are empty. It is quite a sight to see Giorgio Armani wearing a face mask.
There are about 150 confirmed cases, but we expect the number to rise. Judging by the experience in China, we are relatively optimistic that the severe lockdown measures would contain the spread of the disease within Italy and to neighbouring countries. Austria has already stopped an Italian train at the border. The trade-off will be a bigger immediate economic hit, as has happened in China. Lombardy is one of the EU’s most central and most connected regions, in close proximity to both Austria and Switzerland. If the disease spreads from the north of Italy to the north-west, we could see a lockdown of the French-Italian border too, which would have a disproportionately large economic impact.
The crisis hits one of the eurozone’s weakest economies near the bottom of its economic cycle. It will have a fiscal impact, details of which will become apparent soon. While EU fiscal rules allow room for manoeuvre in emergencies, Italy’s public finances are already stretched to their limits. We expect the crisis to constitute a medium-to-strong shock for the Italian economy, while the impact on the rest of the EU will be indirect, through European and global network effects.