European Commission (2019). “Fourth progress report on the reduction of non-performing loans (NPLs) and further risk reduction in the Banking Union.” https://ec.europa.eu/info/publications/190612-non-performing-loans-progress-report_en
European Network of Public Employment Services (2020). “Short-time work schemes in the EU.” Study report written by H Mosley.
Finansinspektionen (2020). https://www.fi.se/en/published/news/2020/proposed-amendment-to-regulations-due-to-reduction-in-countercyclical-buffer-rate/
Gambacorta et al. (2004). “Does bank capital affect lending behavior?” https://www.esrb.europa.eu/national_policy/ccb/html/index.en.html
Google (2020). Community mobility reports. https://support.google.com/covid19-mobility/answer/9824897?hl=en&ref_topic=9822927, 30 November.
Hijzen, A. and Venn, D. (2011). “The role of short-time work schemes during the 2008-09 recession.” OECD Social, Employment and Migration Working Papers 115.
IIF (2020). Prudential Regulatory Measures in Response to COVID-19, update September 18, 2020. https://www.iif.com/Portals/0/Files/Databases/COVID-19_regulatory_measures.pdf?ver=2020-09-11-140736-500
IMF (2020a). FSR June Update.
IMF (2020b). “A crisis like no other, an uncertain recovery.” World Economic Outlook Update, June 2020.
IMF (2020c). Fiscal Monitor, October 2020.
Institute of Global Health Innovation (2020). COVID-19 behaviour tracker. https://www.imperial.ac.uk/global-health-innovation/our-research/covid-19-response/covid-19-behaviour-tracker/, Imperial College London, 30 November.
Jordà, O., Singh, S.R. and Taylor, A.M. (2020). “Longer-Run Economic Consequences of Pandemics.” FRBSF WP, 2020-09.
Kiley, M.T. (2019). “The Global Equilibrium Real Interest Rate: Concepts, Estimates, and Challenges.” Finance and Economics Discussion Series 2019-076.
Kohlscheen, E., Mojon, B. and Rees, D. (2020). “The macroeconomic spillover effects of the pandemic on the global economy.” BIS Bulletin 4.
Kruppe, T. and Scholz, T. (2014). “Labour hoarding in Germany: Employment effects of short-time work during the crises.” IAB-Discussion Paper 17/2014.
Lagarde, C. (2020). “Monetary policy in a pandemic emergency.” Keynote speech by the President of the European Central Bank, at the ECB Forum on Central Banking, Frankfurt am Main, 11 November 2020.
Lane, P. R. (2020). “The ECB’s monetary policy in the pandemic.” Speech at the 62nd NABE Annual Meeting “Global Reset? Economics, Business, and Policy in the Pandemic.”
Lydon, R., Mathä, T. Y. and Millard, S. (2019). “Short-time work in the Great Recession: firm-level evidence from 20 EU countries.” IZA Journal of Labour Policy, Vol. 8(2), pp. 1-29.
Manning, A. (2011). “Imperfect competition in the labour market.” Handbook of Labor Economics, Vol. 4b: Elsevier, pp. 973-1041.
Mühlemann, S. and Pfeifer, H. (2016). “The Structure of Hiring Costs in Germany: Evidence from Firm-Level Data.” Industrial Relations, Vol. 55(2), pp. 193-218.
Müller, T. and Schulten, T. (2020). ”Ensuring fair short-time work - a European overview.” ETUI Policy Brief European Economic, Employment and Social Policy 7/2020.
OECD (2019). “Employment Outlook 2019: The Future of work.” OECD Publishing, Paris.
OECD (2020a). “Distributional risks associated with non-standard work.” Policy note 12 June 2020, OECD Publishing, Paris.
OECD (2020b). “Employment Outlook 2020: Worker Security and the COVID-19 Crisis.” OECD Publishing, Paris.
OECD (2020c). “Job retention schemes during the COVID-19 lockdown and beyond.” Paris: OECD.
S&P (2020a). “Bank Regulatory Buffers Face Their First Usability Test.” June.
S&P (2020b). “The $2 Trillion Question: What’s On The Horizon For Bank Credit Losses?”
Sapir, A. (2020). “Why has COVID-19 hit different European Union economies so differently?” Policy Contribution 2020/18, Bruegel.
Shapiro, A.H. (2020). “Monitoring the Inflationary Effects of COVID-19.” FRSBF Economic Letter, 2020-24, August.
UNCTAD (2020a). “Key Statistics and Trends in International Trade 2019: International Trade Slump.” Geneva: United Nations.
UNCTAD (2020b). “World Investment Report 2020: International Production Beyond the Pandemic. New York and Geneva: United Nations.
Chapter 2
Gross fixed capital formation
Investment in the European Union fell precipitously at the onset of the coronavirus outbreak. This decline followed a slowdown in investment that had gradually set in during 2019 and was exacerbated by government restrictions on movement and business activity, especially in the second quarter of 2020.
Uncertainty and a sharply deteriorating economy, however, are the main reasons for the extraordinary decline in investment. While activity partially recovered in the third quarter, uncertainty is likely to continue to dampen investment in the near term, especially as new restrictions are introduced to contain the second coronavirus wave in the fourth quarter of 2020.
Elevated uncertainty, along with deteriorating firm finances, are likely to further impede corporate investment. The cash flows of non-financial corporates have retreated well into negative territory, causing these firms to draw down their cash balances, which might eventually eat into their net worth. This weakened position damages firms’ ability to finance investment, internally and externally. Investment weakness is likely to persist even as economic conditions gradually improve.
The coronavirus outbreak is likely to prompt increased digitalisation and, in the medium term, to cause shifts in supply chains and product portfolios. Many of the companies bearing the brunt of the ongoing crisis see a permanent reduction in employment as another longer-term consequence. Policymakers should take action to ease the reallocation of labour to avoid large increases in structural unemployment.
Government investment in 2020 may be another victim of the pandemic. Even though policy support has been strong, there are signs that government investment levels might decrease across EU Member States. The decline in government investment must be halted and reversed from 2021 onwards. Redirecting investment from current to capital expenditure seems to be the sustainable option. It can be further supported by debt issuance for countries with sound fiscal positions.
Introduction
The initial impact of the coronavirus pandemic on investment in the European Union has surpassed the effects of the global financial crisis. In just two quarters, investment declined to the same extent as in the first year of the recession in 2008-2009. While there is no financial crisis to worry about