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Europe’s Welcome Pandemic Response

Although the sudden stop imposed by COVID-19 is having far-reaching consequences for European Union economies, the EU's policy response has already far surpassed its efforts to mitigate past crises. Europe may not be out of the woods yet, but it is clearly on the right path.

PARIS – The COVID-19 pandemic has hit EU member states hard, and will continue to confront the bloc with significant economic challenges. Yet, from a macroeconomic perspective, Europe’s policy response so far has been encouraging, because it includes strong incentives for sustainable growth, solidarity, and economic stability.

European governments have committed to pursuing unprecedented fiscal measures in response to the crisis, and – equally important – markets seem to have deemed these measures appropriate. Recent sovereign-debt offerings by Portugal and Italy were priced at very low rates and were largely oversubscribed. Across Europe, sovereign-bond yields are similar to what they were at the end of 2019. Although spreads and credit-default-swap pricing on certain European governments’ debt have widened, they are nowhere near the levels seen in previous shocks. In other words, the fragmentation of European financial markets is much more contained than it was in 2009 or 2012.

Moreover, there are good reasons to believe that the COVID-19 policy response will play out differently than the one that followed the 2008 financial crisis, even though the recession might be deeper this time. S&P’s forecast anticipates that GDP will contract by 6% in Germany, 8% in France, and 10% in Italy this year, and that debt-to-GDP ratios will soar as a result of the recession and the unprecedented fiscal response.