New Lockdowns Could Lead Europe to Economic Depression

September 20, 2020 Updated: September 23, 2020


The rise in COVID-19 cases in countries such as France and Spain has increased the risk of new lockdowns.

Governments should understand by now that shutting down the economy is highly inefficient and devastating for jobs and business solvency. However, as we’ve seen in Spain, many governments simply decide to implement new lockdowns in order to show that they’re taking aggressive measures, even knowing that the lockdowns generate more negative effects and have no real impact on preserving health.

Instead of looking at the examples of South Korea, Taiwan, Sweden, or Austria, where simple but effective measures have resulted in a better management of the health crisis, some European governments are ignoring the economic and social long-term disaster that closing down the economy has created and seem prepared to repeat past mistakes.

The mistake of ignoring the economic impact of lockdowns creates a social crisis that may last for many years.

If the European economy was ill prepared for a series of lockdowns in February, it’s even weaker now. What created a recession of unexpected proportions may generate a depression that will likely last for a few years.

European economies cannot survive a new series of lockdowns, even if governments call them “targeted.” Why?

Solvency has worsened. The financial system would see nonperforming loans soar in an economic area where Standard and Poor’s estimates that more than 20 percent of businesses are in serious financial trouble or close to bankruptcy. A new series of lockdowns would likely start a new financial crisis.

Unemployment has been disguised. European unemployment looks optically low due to the large proportion of furloughed jobs. The euro area 7.9 percent official unemployment rate could double when those furloughed jobs end and the businesses that kept on those workers find they need to close permanently.

Governments’ financial situations have weakened to extreme levels. Deficit spending has driven government debt to new record highs. Debt could increase well above 120 percent of GDP in the eurozone if the economy is closed again, even in so-called targeted shutdowns.

Investors have been buying high-risk bonds from almost insolvent governments and highly indebted corporations at all-time-low yields, taking significant risk on expectations of a rapid recovery of the economy. The nominal and real losses in pension funds and investment plans can be massive.

This time the European Central Bank will not be able to contain the financial risk. More quantitative easing and further rate cuts will likely fail to stop bond yields from soaring when the solvency and liquidity problems meet the reality of an unsustainable spending spree.

Market participants are not considering the redenomination risk on the euro when anyone can see that many populist parties proposed measures in the European Commission to break up the euro in 2016. These investors are looking at the eurozone as a haven compared to the alleged political risks in the United States without acknowledging that the financial and political risks in Europe are significant.

New lockdowns could be the black swan that many market participants fear and ignore as a nonexistent option. The optimistic estimates of eurozone recovery, earnings growth, and consumption recovery are all based on an improvement in economic data that seems almost impossible to achieve in the current scenario, let alone under new confinements.

Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.