A New Strain Joins Europe’s Covid Wave. What That Means for the Economy.
A new, virulent strain of coronavirus first identified in South Africa raises fresh fears in Europe just as governments throughout the continent are preparing measures to counter the spread of a fourth wave of Covid-19.
The African variant, called B.1.1.529, was identified within days of its discovery in Israel, Hong Kong, and Belgium, leading to many countries immediately banning travel to and from South Africa and neighboring states.
Whether or not the new variant proves resistant to existing vaccines will take several weeks to ascertain. After nearly two years of the pandemic, governments, businesses, and households are better prepared to cope with the problem. But restrictions already in place—or in the pipeline—will dampen the continent’s economic recovery.
Austria has taken the most radical measures so far, with a national lockdown that shut all stores save for those selling basic goods, and a requirement for people to stay home. However, Austria accounts for less than 3% of the European Union’s gross domestic product.
Up until now, the strength of the new spike has been correlated with the pace and acceptance of vaccinations throughout the continent.
Germany, the region’s largest economy, is facing a “highly dramatic situation,” according to departing Chancellor Angela Merkel, who has urged her successor, Social Democrat Olaf Sholz, to implement new, nationwide restrictions. So far, only some regional authorities—including in the capital, Berlin—have begun to try to counter the fourth wave.
Beyond travel restrictions aimed at Africa, the EU’s three other big members—France, Italy, and Spain—have refrained from dramatic steps so far. Even before the discovery of the South African strain, noted Deutsche Bank analyst Jim Reid, “a number of less-affected countries [were] seeing cases move in an upward direction, including France, Italy, and the U.K.”
So the type of measures even these governments might have to take will be “key ones to watch and will have big implications for economies and markets too,” Reid wrote.
While Austria and Germany have some of the lowest vaccination rates in Europe, other governments have no reason to be complacent. ING economists Franziska Biehl and Carsten Brzeski note that “the past couple of years have shown that the feeling of being ‘safe or secure’ can be misleading and can be quickly overtaken by events,” and that further restrictions would “increase the risk of economic stagnation as we enter a new year.”
Austria has made the vaccine mandatory, but other countries are trying to reach the same goal by different means—for example by restricting normal activities such as going to restaurants. But even restrictions limited to the unvaccinated have a negative impact on demand—for example, by banning travel for a segment of the population.
“Fear of the virus is substantially less than last year, but restrictions do hamper economic efficiency—as does the spaghetti bowl of tangled regulation involved in international travel,” writes UBS chief economist Paul Donovan.
No one for now can quantify the hit to growth from the coming restrictions. But they may present a new problem for governments and central banks. If the economy takes longer to recover, the return to some form of fiscal discipline, in countries that were considering it, will have to be postponed.
And if the B.1.1.529 strain proves as virulent as feared, central banks planning to unwind quantitative easing or raise rates may reconsider their decisions —or delay the return to monetary policy as usual.