Economic damage spreads as Europe confronts coronavirus
In London, Hammerson, an operator of premium retail outlets in Amsterdam, Prague and Milan, is suffering the loss of free-spending Chinese tourists trapped at home by the coronavirus.
In Copenhagen and Marseille, Maersk and CMA CGM, a pair of major cargo shippers, are watching orders on their Asian routes evaporate, casualties of Chinese factories that are still operating well below capacity.
And in Stuttgart, automaker Daimler, which employs nearly 174,000 German workers, warned the epidemic could mean “significant adverse effects on production, the procurement market and the supply chain.”
The coronavirus, which has killed nearly 2,800 people worldwide and all but paralyzed China for the past month, now is targeting Europe’s $19 trillion economy. With countries such as China, Italy and Japan that account for 30 percent of global output already feeling the ailment’s effects, the danger of more severe global turmoil is mounting.
“The economic effects of a severe pandemic could be as bad as those of the global financial crisis” of 2008, Capital Economics, a London-based research consultancy, warned clients on Wednesday.
Along with disrupting major industries and turning trading screens red, the uncontrolled outbreak could also shake European politics by boosting nationalist sentiment.
European Union officials earlier this week rejected calls to suspend the 1985 Schengen agreement, which eliminated border checks in a 26-country region, saying such closures would do little to curb the epidemic.
But with nationalist parties gaining strength in countries such as Germany and Italy, the border-jumping coronavirus threatens to merge with economic worries to create a more potent anti-globalization force. French Finance Minister Bruno Le Maire last week complained of an “over-dependence” on Chinese industrial suppliers, echoing the views of Peter Navarro, one of President Trump’s closest advisers.
“The political consequences are possibly more daunting than the economic ones,” said Douglas Rediker, chairman of International Capital Strategies. “The integration of Europe, deeper, wider, broader — which was already being questioned — this runs the risk that the economics and politics feed off each other and you end up being less cohesive.”
The epidemic’s economic fallout is quickly accumulating.
Cancellations are pouring in at the Acampora Travel agency in central Venice, just a few minutes’ walk from Piazza San Marco, the city’s famed central square.
On Wednesday morning, two groups from Mauritius backed out of tours they had planned for the end of March and early April, citing Italy’s growing coronavirus outbreak. The Mauritian travelers feared getting stuck in a 14-day quarantine after returning home, said Georgia, an Acampora travel agent who would give only her first name.
“We’ve had a lot of cancellations, and for us it’s a terrible moment,” she said. “It seems like someone wants to kill all of the tourist industry and economy.”
Indeed, an Italian hotel association two days earlier had pleaded via tweet for “urgent intervention” on a national scale, “before the long wave of cancellations turns into a tsunami, forcing many companies to reduce their staff or even to close their doors.”
Italy’s economy was scary enough. Then came coronavirus.
The coronavirus has been a fearful challenge everywhere. In China, the interruption of normal factory operations came just as the country hoped to shake off the effects of a two-year trade war with the United States. In South Korea, site of the largest Asian outbreak outside of China, a cluster of nearly 1,300 cases is slowing an economy that was beginning to accelerate.
But the virus poses special challenges for the European Union, which is already preoccupied with Brexit, the United Kingdom’s departure from the E.U., and the threat of a tariff war with Trump.
Indeed, after a decade of financial crisis and anemic economic growth, a fatal epidemic is the last thing Europe needs.
Even before the coronavirus — and its associated illness, covid-19 — established a foothold in Italy, the continent’s major economies were expected to grow just a bit more than 1 percent this year. Now the outbreak’s inevitable disruption to the tourism, manufacturing and retail industries threatens to tip the European Union into outright recession.
“Things are going to get pretty bad in Europe,” said Adam Posen, president of the Peterson Institute for International Economics.
In recent days, the virus that originated in the Chinese city of Wuhan -- before spreading to South Korea, the Philippines, Japan, Iran, Afghanistan and Bahrain -- became a European problem.
A swath of northern Italy, responsible for about 30 percent of the country’s economy, is under lockdown after authorities reported more than 280 cases and 11 deaths.
France reported the first death of a French citizen. Elsewhere, Spain confirmed at least eight new cases in the past 24 hours and new infections were reported in Germany, Greece, France, Croatia, Austria and Switzerland.
Disruption quickly rippled across the borderless European economy. The French national rail line SNCF said some of its Milan-bound trains are stopping at the border with Italy, where Italian crews are replacing French personnel, according to French media reports.
In Prague, airport authorities said travelers arriving from Italy would be herded through designated gates. And the European Parliament advised staff who had recently traveled to China or Italy to stay home for at least 14 days, believed to be the incubation period for the virus.
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Financial markets in Europe have lost about as much ground this year as their U.S. counterparts. The blue-chip Euro Stoxx 50 has given up more than 9.5 percent of its value compared with a loss on the Dow Jones industrial average of about 9.7 percent.
Since Jan. 20, the disease has stripped $4 trillion from the value of global stock markets.
In Europe, the most visible economic damage is hitting the tourist sector, just as Americans are preparing for spring travel.
Tourism is big business in Europe, home to celebrated attractions such as the Eiffel Tower, the Sistine Chapel and the Prado Museum. The tourism sector accounts for 3.9 percent of Europe’s GDP and nearly 12 million jobs, according to the E.U. Among the fastest-growing sources of tourist revenue has been China. Chinese tourists in 2018 spent a total of 22 million nights in European hotels, almost five times as many as a decade earlier.
The virus is affecting some of Europe’s most popular destinations, including Milan, Venice and top ski resorts. Coronavirus fears already led organizers to cancel a major technology industry conference in Barcelona this week and to end Venice’s popular Carnival season two days early.
More troubling scenes appeared on the Spanish resort island of Tenerife, where 1,000 people were quarantined in a beachfront hotel after a tourist tested positive for coronavirus, according to Spanish authorities and the island’s hotel association, Ashotel. The visitor came from Italy’s Lombardy region, according to Spanish media reports.
The hotel association pleaded for “calm and tranquility,” insisting the island has “a first-level health service” that follows established protocols. Sky News posted footage of hotel guests gazing listlessly from their balconies while police with protective masks — some wearing them, some allowing them to dangle around their necks — stood watch outside.
“It is increasingly possible that we will see a sustained disruption in global trade, cross-border travel, and global supply chains,” Tony Roth, chief investment officer at Wilmington Trust, wrote in a note to clients. “The cancellation of large gatherings in Europe, including the Milan fashion show and the Venice Carnival celebration, foreshadow a longer lasting economic hit to companies in virtually every industry.”
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The risk of recession in Europe or Japan, he added, “has dramatically risen.”
The European Central Bank is poorly armed for the battle against this unexpected economic shock. Its key interest rate already is negative, meaning the ECB charges banks for holding their excess deposits. Monetary authorities also already resumed their asset purchase program last fall, buying 20 million euros of bonds each month to stimulate the sagging economy.
“Monetary policy in the euro zone is exhausted,” said David Kotok, chairman of Cumberland Advisors, an investment firm in Sarasota, Fla. “They’re going to have a recession.”
ECB officials for years have tried to cajole European political leaders — especially in Germany — into stimulating the moribund economy with big spending projects. German Chancellor Angela Merkel, with an eye on the country’s constitutional debt limit, has long resisted such fiscal stimulus.
But this week, the German finance minister is reportedly preparing to ease the so-called debt brake to help local government finances. On Wednesday, ECB President Christine Lagarde welcomed the move, saying “any fiscal measures intended to support the economy are certainly very welcome, particularly under present circumstances.”
Still, there are concerns about the perennially unstable Italian government’s capacity to deal with the virus, which comes as Germany is enduring a rocky political transition from Merkel’s 15-year chancellorship.
“The coronavirus, like any epidemic, is a stress test for governance and societies,” said Posen.
Europe also may soon face the same dilemma that China confronted as its epidemic swelled. Restrictions on large gatherings, including on public transit systems, entertainment venues and workplaces, inevitably depress business activity.
“I get the sense we’re heading into a new phase here,” said economist Stephanie Segal, a senior fellow at the Center for Strategic and International Studies. “The containment measures themselves do have an economic impact.”
Segal said the problem for policymakers may get tougher over time. If the economic hit is long-lasting, losses will spread from factories and offices into the financial sector. An interruption in the normal flow of credit is what distinguishes a standard economic recession from the sort of crisis that swept the globe in 2008.
“So far, Euroland banks are not facing a credit squeeze or liquidity demand in the wake of lockdown and quarantine policies — first in China and now in Europe as well,” economist Carl Weinberg of High Frequency Economics wrote this week. “We do not know if this will last.”
By David J. Lynch and Jeanne Whalen