In the first half of 2020, Europe mounted a bold and swift economic response to the Covid recession. As the second wave of the pandemic triggers a new slowdown, policy makers appear to have lost some of their mojo.
Governments are struggling to deal effectively with the health crisis, as they dither between keeping economies open and imposing new restrictions.
The European Central Bank (ECB) looks set to announce a new round of stimulus in mid-December, but it's unclear how much it can contribute to the recovery.
European Union member states are at loggerheads as the bloc tries to finalize a multi-year budget that includes a joint pandemic recovery fund. While an agreement appears the most likely outcome, the delays will hurt the prospects for a speedy economic rebound.
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Contraction
Thankfully, this year's second downturn appears less pronounced than spring's sharp contraction. Manufacturing has maintained a decent pace thanks to the resilience of global trade, helped by China.
Even in services, the new lockdown restrictions have largely been less draconian and hence less damaging.
The euro area is expected to contract by 1.7 per cent in the three months to December, according to a composite forecast from Bloomberg. That's much less than the second quarter's 11.8 per cent fall.
However, it would be wrong to treat these two recessionary waves as distinct, since their cumulative effect matters greatly. It was bad enough for restaurant owners and shopkeepers to close during the first restrictions. The second lockdown, while milder, has been more brutal in many ways, piling misery on top of the lost revenues from the first half of the year.
As ECB President Christine Lagarde noted this month: "If the public no longer sees the pandemic as a one-off event, we could see more lasting changes in behaviour than during the first wave."
This could mean more bankruptcies, more discouraged workers and greater long-term damage to the economy.
At least the euro zone had a strong foundation for coping with the latest shutdowns. In spring, the European Commission suspended the bloc's fiscal rules, paving the way for a forceful response from governments.
The ECB launched a large package of bond purchases, which became more flexible over time.
Response
To top it up, EU leaders agreed to a programme of grants and loans that the Commission will fund by borrowing on the financial markets. The lessons of the slow response to the last decade’s euro zone debt crisis appeared to have been learned.
And yet, the ghosts of failure are haunting Europe again.
In Spain, France, Italy and elsewhere, governments failed to prepare adequately for the virus's second wave; health care systems and track-and-trace operations collapsed under the weight of case numbers.
Governments were desperate to keep businesses open but in doing so they failed to contain either the humanitarian or the economic crisis.
Politicians are plotting a new round of reopening to “save Christmas” (and retailers), but hospitals are already running near capacity. There’s the risk of a third wave in January, just before the expected widespread rollout of Covid vaccines.
The ECB is doing its part. Bond yields are at record lows; 10-year government debt from Spain and Portugal could join soon the sub-zero club. Lagarde is ready to add to the ECB's €1.35 trillion asset-purchase scheme, and offer more generous cheap loans to the banks to ensure they keep lending to the real economy.
Limits
However, there are limits to what she can achieve. Lowering funding costs to governments, businesses and families is welcome, but that won’t by itself spur investment nor ensure that money is well spent. The limits of monetary policy have become visible.
The biggest political failing concerns the "Next Generation EU" fund, Europe's attempted fiscal response to the pandemic. Hungary and Poland are threatening to veto the multi-year budget because of the linkage of payments to abiding by the rule of law.
Warsaw and Budapest are likely to backtrack, since a veto would deprive them of financial aid at a time of acute distress. But these tensions lay bare the difficulties of mounting a joint EU fiscal response.
Euro zone countries should consider creating their own budget instead, to escape the whims of countries that aren’t members of the single currency.
Summer's short-lived optimism, as the first outbreak receded, gave Europe the illusion of having managed the pandemic and the economic shock as competently as Asia and better than the US. The second wave shows this was wrong.
The end of the health crisis looks tantalisingly close, but it’s not here yet. Worse, a vaccine won’t cure long-term damage to the economy. Europe must rediscover its earlier urgency.
Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
