Looking for a New Chapter in Central Eastern Europe

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Since the start of the outbreak in late 2019,  has mounted that early implementation of containment measures leads to better outcomes. It appears that countries that introduced strict containment measures after only a handful of confirmed cases of COVID-19 were discovered — or even shortly after the first death was recorded — tended to fare better in containing the spread of the virus and preventing it from getting out of hand. 

In Western Europe, Portugal is a case in . In Central Europe, Slovakia has championed the crisis response with the lowest of deaths per capita on the continent. Lagging behind its Western European peers on several other counts, Central European countries have been surprisingly apt at managing the COVID-19 crisis. 

It comes as no surprise, therefore, that the region’s governments have been under pressure to start gradually lifting their lockdowns to contain the coronavirus. The Slovak government, for example, has introduced a four-phased reopening strategy that is dependent on the situation continuing to improve. The policy, which is reassessed every two weeks, looks at the in the number of people being hospitalized with COVID-19. In the first phase, which commenced on April 22, shops and places with an area of up to 300-square meters were allowed to resume operations. Poland went ahead with a similar step on April 20 and Austria dared to do so even earlier on April 14.  

Buying Time

The world has taken notice of how well Central Europe has handled the pandemic. Yet the region has recently been called out for its overly strict containment measures, given that Central Europe’s robust containment position — with few confirmed infections each day and one of the lowest death tolls on the continent — came at a sizeable economic cost.

Such debates are important, especially if scaled by data-backed interdisciplinary considerations. The process of economic resurgence should be data-driven and science should play a key role in how governments form recovery strategies. The gradual nature of lifting lockdowns means that we are still buying time to learn more about the coronavirus.

A recent about COVID-19 and immunity puts it succinctly when it says the “reliance on comprehensive … [data and conducting solid research into protection] … will allow policy to be guided by secure, evidence-based assumptions on herd immunity, rather than optimistic guesses.”

An agnostic reopening approach also seems warranted as epidemiologists warn of a possibility of a second wave of the outbreak. International research institutions, including the Organisation for Economic Co-operation and Development (OECD), have  for testing as a way not only to lift containment measures, but also to fight any second bout of COVID-19. Specifically, the study estimates that between 70% to 90% of people that an infected person meets will need to be traced, tested and isolated, which the OECD sees as our best bet in the absence of a vaccine. 

This is especially important for Central Europe, where the  rate per 1,000 population is low, hovering at about 5% for Slovakia and below 4% for Poland and Hungary in recent months. The capacities for far-reaching and extensive testing, tracing and isolating must be stepped up. The associated challenges and economic costs are dim compared to the consequences of another coronavirus lockdown.  

The Economic Toll

On April 30, the European Statistical Office its flash GDP estimate for the eurozone and the European Union for the first three months of the year. At -3.8% on quarter, the eurozone seems to have posted its worst contraction on record. The EU economy seems to have performed marginally better at -3.5% on quarter, padded by the presence of countries (including many in Central Europe) where the coronavirus outbreak was milder.

Still, this is just a warmup for Q2, when a double-digit quarterly contraction will not be far-fetched for the period of three months between April and June, the point that COVID-19 sent the European economy into an ice age. For macro analysts and the like who are used to looking at national accounts data, the numbers will be beyond surreal, but a painful coronavirus bill was expected. Now, the real question is: How can these economies return to normalcy beyond Q2, if at all?

As a bottom line, for as long as a vaccine is out of reach, consumption and investment activities are set to stay quiet in the quarters to come. After having experienced such a heavy hit to confidence, consumers, companies and investors will likely remain vigilant for some time. Different economic reopening models may continue weighing down trade activity and the smooth running of , which are important features of the regional economy.

There is also the risk of a second peak of the coronavirus, something the eurozone needs to gear up for now. In sum, it will take Herculean efforts, a little faith and some time to jumpstart the economic recovery.  

Sensible and data-driven reemergence strategies are important, but so is the medium-term playbook. The successful management of the pandemic in Central Europe to date has been a silver lining of a severe health crisis. And we will, hopefully, have more reasons for optimism as governments and stakeholders take COVID-19 as a catalyst to take up , complete integration of financial and capital markets, take a leap toward  and introduce the much-needed dormant reform efforts, which have the potential to upgrade the region to a higher order of recovery mode. 

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Central Eastern Europe is an economic success story. Since its transition to a market economy over three decades ago, the CEE enjoyed rapid growth and was catching up with its Western peers. The expansion was fueled by manufacturing, dynamic exports, investment from overseas, inexpensive labor and, more recently, funds from the European Union. This enabled the region to close the economic gap with Western Europe, which meant the standard of living improved. 

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Yet economic growth had been waning and its engine lost traction well before the coronavirus broke down the door. With good times in the rearview, the region’s competitive advantages like cheap labor withered. The EU’s current funding program is also about to end.

Moreover, the economy’s reliance on manufacturing is a risky game amid the tectonic shifts taking place around the world. Central Eastern Europe remains undercapitalized and under-digitalized. If anything, the economic slump that the COVID-19 pandemic has led to is the region’s wakeup call to reinvent itself if it hopes to rise from the ashes in a post-coronavirus world and get back to economic prosperity.

Like most of Europe, the CEE region will have seen its first coronavirus-related economic fallout at the end of the first quarter of 2020. It is reasonable to expect the second quarter to be cataclysmic in terms of GDP losses. The third quarter should exhibit some signs of an awakening in economic activity, culminating in the winter months. It is sensible to expect subdued dynamics in real economic activity far beyond 2020. 

Taking Out Both Legs 

Domestic demand, especially in household consumption, was a dependable source of growth for the CEE over the past decade. Conventional industries, particularly automotive manufacturing, have driven the region’s exports and provided a backbone to the economy. The COVID-19 outbreak and the necessary containment measures that have occurred throughout the region will have struck the legs of the CEE economy.

To contain the coronavirus and reduce its spread, protective measures in Central Eastern Europe have included restricting cross-border travel, banning public events, closing retail outlets (except for critical ones), limiting production in industry, enforcing quarantines and encouraging people to stay at home. Public health concerns aside, CEE legislators are rushing to respond with a stimulus to maintain the economy’s basic functions and provide a lifeline to the most vulnerable in society.

Central bankers across Europe have continued the course of synchronized monetary easing to maintain liquidity and a provision of credit. To that end, they combine rate slashing — such as in Poland and the Czech Republic — with asset-buying, like the European Central Bank’s pandemic program that is accessible to the CEE’s eurozone members.

The ultra-easy monetary stance is accompanied by national fiscal stimuli to support firms and employees at risk. To date, the CEE has seen employer refund schemes to compensate for wages paid while employees are on leave, as well as tax filing deferrals, frozen debt enforcement measures, moratoria on statutory periods of limitation and the accumulation of interest on debt between certain periods, and subsidies of employee social security income. More aid is expected.

The question remains about whether the vast fiscal effort is financed by loans or funded by a permanent increase in the supply of money. In his work, Austrian economist Friedrich von Hayek believed that political ends should not meddle with price stability. He argued in favor of “dissolving the unholy marriage” between monetary and fiscal realms. Contrary to that, the Organization for Economic Cooperation and Development (OECD) recently  that fiscal backing could be financed by a permanent increase in money supply, as long as central banks retain their independence and economies operate below their potential.  

In any case, if the last decade was ruled by monetary policy, it is now the moment of fiscal policy. However, given budget limitations, cross-country coordination should be key in helping to reinforce the mutual effects of these measures against the common enemy. 

Seeing Beyond the Storm 

The size of the slump will depend on the duration of the containment measures, the restoration of existing manufacturing supply chains, and the overall speediness and efficacy of the public response. To get a rough idea of the magnitude at a country level, the National Bank of Slovakia  that the Slovak economy should contract by between 4.5% to 9.4% in 2020, leading to the temporary unemployment of 75,000 to 130,000 people. But could Central Eastern Europe see beyond these devastating numbers and turn the crisis into an opportunity?  

It turns out that plagues are effective in uncovering dysfunctional economies. In the CEE, it has underscored the region’s underdeveloped digital landscape. There is no good reason why in times like these that people shouldn’t be comfortably serviced by online-based companies when it comes to basic necessities like food and medicine. If anything, shortages, late deliveries and canceled orders suggest a lack of smart inventory management and digital tools in the region. It may also indicate that only a small number of businesses in some CEE countries have an online presence and digital infrastructure.  

The under-digitalized and undercapitalized region, with its outdated industry and lagging productivity, is uniquely situated to harness the digital opportunity in its path. A 2018  by McKinsey estimated that “by closing the digital gap with Northern and Western Europe, CEE could earn up to €200 billion [$217 billion] in additional GDP by 2025—a gain almost the size of Portugal’s entire economy.” 

In China, the 2003 SARS epidemic led to the cultivation of its then- sector. Central Eastern Europe can follow suit not only to weather this storm, but also to lay the ground for the region’s much-needed economic renaissance. 

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The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

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On the one hand is the supply side, with production capacities cut back or stopped altogether as per the instructions of authorities. Volkswagen Slovakia, the largest Slovak employer, has suspended production in all three plants. Other large manufacturers are likely to follow suit. On the other hand is the demand side as consumers have been told to stay at home and have limited access to goods and services.

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Both of these factors are putting pressure on domestic economies and international trade. Added to that, transnational supply chains are severely disrupted and tumbling stock markets are wiping away wealth. The uncertainty about the extent, severity and future trajectory of the coronavirus — which causes COVID-19 — further impairs the confidence channel.

These effects have struck the real economy at superspeed and affected our daily lives. People are stockpiling to reduce the frequency of grocery shopping trips as well as panic buying in the expectation of shortages. Food chains offering home delivery services are overwhelmed by the number of orders. Many companies are forced to cancel online orders due to high demand, citing “technical issues.” Despite calls for social distancing by governments, hardware stores are facing perpetual lines, and their half-empty shelves trigger painful memories of the golden era of socialism.

Meanwhile, in Slovakia, some individuals have not grasped the sense of urgency in managing the outbreak. Troubling social media posts have surfaced of citizens seeing this emergency as an opportunity to let off some .

The Economy

The economics of the COVID-19 outbreak is an interesting one. The behavior of individuals has a significant impact on the public health and economic outcomes of an entire country. The behavior exemplified by some in Slovakia will inevitably lead to a scenario like Italy, which is currently the European epicenter of the coronavirus pandemic. On the other hand, the combination of prudent, top-down decision-making, coupled with bottom-up responsibility, could lead to a more managed outcome — both socially and economically.

As the pandemic sheds light on the classic dichotomy between individualism and collective interest, it begs the question of what globalization and supranational cooperation can do for us these days. With the world at unease, central banks continue running the course of synchronized monetary easing. On March 15, the US Federal Reserve delivered emergency interest rate cut that is now nearly zero. This was accompanied by the launch of a massive $700 billion quantitative easing program. The European Central Bank announced its own set of on March 12, including immediate liquidity support and its own asset-purchase program. Moreover, world leaders have to take concerted fiscal action.

The economic response is critical. The objectives include helping the economy to continue functioning, preventing the hardest-hit sectors and businesses from going bust, and ensuring that public health care is sufficiently funded. National policy measures are a vital part of a comprehensive response strategy, as each economy has been affected differently by the coronavirus pandemic and they each have different resources at hand.

An intense global downturn will, additionally, demand heavy lifting on the part of international institutions. This response must be comprehensive, multi-disciplinary and fast-moving. This is not a time for interstate bickering. Multilateralism may be in a dire state, but it is now the time to stick to the basics and synchronize across policy domains that are mutually agreeable.

Bringing Change

The COVID-19-induced crisis will lead to a broader paradigm shift in policymaking. One-sided policymaking will no longer suffice. A balanced and diversified approach across toolkits (monetary-fiscal-structural), actors (national, international) and time (short-term versus long-term impacts) is the global economy’s best bet in addressing the fallout that will ensue. Policy dominated by a strategic foresight and a targeted, potential-enhancing and resilience-strengthening approach is long overdue.

The health of the economy is also bolstered from the bottom up, and the COVID-19 outbreak has highlighted systemic weak points across business and supply chains. It is Schumpeterian creative destruction at its best. Supply shortages across “winning sectors,” such as food and medical supplies, indicate poor inventory management and analytics. Long lines outside stores and canceled online orders suggest a lack of digital presence and associated infrastructure.

The disruption of supply chains means different things to different sectors. Some industries should rethink their excessive reliance on one country or region, such as China, while others should consider diversifying their sources. The current situation with supply chains highlights the need for business contingency plans geared toward being operational with minimal workers physically present. In any case, harnessing existing technologies, coupled with the constant reframing of business efforts seem to be the suitable foundation for a makeover in business.

It is only March and we are at an inflection point in 2020. The extent of change in our daily routines and the tyranny of uncertainty we are not accustomed to will be carved in our collective memory for many years to come. But as the saying goes, never let a good crisis go to waste. The global health crisis may be the catalyst for much-needed change across policymaking domains and business. This is a change that, in normal times, would slowly unfold for perhaps an entire decade.

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The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

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I am writing this column in a state of a latent denial. Having worked from home for much of the past week, I’ve been trying to juggle work duties with kid’s entertainment as schools and childcare facilities are shut down.

Will a Struggling Global Economy Survive the Coronavirus?

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But denial is unwarranted, as we wake up to another series of breaking news, including the US ban on any European travel for 30 days, the World Health Organization’s declaration of the COVID-19 outbreak as a and the crashing stock markets.

The situation in Wuhan, China, looked dire just weeks ago. Yet that seems like a distant memory ever since Prime Minister Giuseppe Conte put the whole of Italy in quarantine. Medics attending to COVID-19 patients have provided shocking accounts of the state of affairs in the European epicenter of the coronavirus outbreak.

The Recession

The consequences of the pandemic for the global economy will without a doubt be crippling. To be frank, it’s not like we haven’t been pondering the onset of the next recession for some time now — we have. A distinct slowdown in real activity, manufacturing and trade, coupled with leading indicators such as business and consumer confidence on a downward trajectory, has for many months signaled the final stage of the current economic cycle. This economic expansion has been exceptionally long, although that does not increase the probability of a recession. The inverted yield curve in the US set in in the summer of 2019 was another indicator. In fact, Google searches for the term “recession” soared in tandem and are predicted to skyrocket in the days ahead.

It is little wonder why this has happened. According to the US and other agencies operating in the field of public health, our best bet for slowing down the contagion is social distancing. That’s why in order to contain the coronavirus, authorities in the worst-hit areas have locked down cities, entire countries, imposed full travel bans or restricted the movement of millions of people and limited or suspended business operations. And we thought the global economy had problems.

While at this point it is hard to quantify the COVID-19-induced recession, the measures undertaken give some pointers as to what economic channels become compromised, as the spread of the virus continues. Quarantines hamper both consumption and production as consumers and workers are bound to stay at home. This places a limit on household spending on both goods and services. Supply chains also get disrupted as production is cut back and fewer goods are sold and exported. Foreign demand decreases, too.

Moreover, sectors like Chinese manufacturing or the travel and tourism industry — the latter approximately accounts for more than 10% of global GDP, according to the World Travel and Tourism Council — will particularly feel the impact. The fact that it is difficult to predict the future path, extent and seriousness of the outbreak adds to the decline in confidence.

A classic transmission of the shock is taking place via the financial markets, which have priced in the disruptive potential of the outbreak quite aggressively. As major stock markets sell-off, household wealth will act as an additional setback on future consumption due to the effect on purchasing power. To be clear, the COVID-19-induced downturn would be a crisis of the real economy first and foremost, emanating from severe hits to real activity on both the supply and demand side, rather than a classic financial crisis.

The Recovery

On the upside, China is beginning to rise from the ashes of the coronavirus outbreak. The recent fall in crude oil prices may help, with China being the largest crude oil importer in the world. On the policy front, some central banks have responded with the usual medicine — the US Federal Reserve leading the way in delivering a surprise 50-basis points cut and G7 leaders vowing to fiscal stimuli.

History provides clues for how to recover from similar disruptions. Empirically, most from epidemics have been V-shaped, thus marked by a relatively brisk rebound after an initial epidemic-induced slump.

There is no way to prepare for a Black Swan moment of such magnitude. But, speaking from a long-term macroeconomic policy perspective, let’s admit that we have taken some shortcuts. Not giving names and pointing fingers, the former chief of the European Central Bank (ECB), Mario Draghi, advocated the importance of structural reforms and growth potential-enhancing measures in each ECB press statement I can possibly recall.

Yet we haven’t exactly done our homework on the resilience front. It would have been nice to enter the new decade with more funds for rainy days. So yes, we are on the verge of a grave crisis, both human and economic. But crises can teach us a lesson or two. Ours is that once the affected regions emerge from the current standstill, we will have to fire up all our engines in an integrated and well-rounded policy strategy and get our hands dirty… really dirty.

*[ is a partner institution of 51�Թ�.]

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

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