Impact of COVID-19 on EU economy

All European Union countries are undergoing severe output losses as a consequence of the COVID-19 crisis, but some have been hurt more than others. In response to the crisis, EU leaders have agreed on a Recovery and Resilience Fund (RFF), which will help all EU countries, but those hit hardest will benefit most.

This Policy Contribution explores why some countries have been hit economically more than others by COVID-19. Using statistical techniques described in the technical appendices, several potential explanations were examined: the severity of lockdown measures, the structure of national economies, the fiscal capacity of governments to counter the collapse in economic activity, and the quality of governance in different countries.

We found that the strictness of lockdown measures, the share of tourism in the economy and the quality of governance all play a significant role in explaining differences in economic losses in different EU countries. However, public indebtedness has not played a role, suggesting that that the European Central Bank’s pandemic emergency purchase programme has been effective.

We used our results to explore why some southern EU countries have been more affected by the COVID-19 crisis than some northern countries. Depending on the pairs of countries or country groupings that we compared, we found that differences in GDP losses were between 30 and 50 percent down to lockdown strictness, between 35 and 45 percent to the quality of governance and between 15 and 25 percent down to tourism.

This could have implications for the allocation of the RRF between recovery and resilience expenditures. Supporting the recovery through a combination of demand and supply initiatives is important to ensure that countries rebound as quickly as possible from the COVID-19 crisis, without leaving too much permanent damage to their economies. But in many countries, especially some of the southern countries hit hardest by the COVID-19 crisis, resilience is a major sticking point. Too often, in some of these countries, the poor quality of governance has had a negative impact on their resilience, as the relatively large size of their GDP shocks has demonstrated. It is crucial therefore that RRF programmes devote sufficient attention (and resources) to improving the quality of governance in these countries.

Recommended citation
Sapir, A. (2020) ‘Why has COVID-19 hit different European Union economies so differently?’, Policy Contribution 2020/18, Bruegel

About the authors

• André Sapir, a Belgian citizen, is Senior Fellow at Bruegel. He is also University Professor at the Université libre de Bruxelles (ULB) and Research Fellow of the London-based Centre for Economic Policy Research.

  Between 1990 and 2004, he worked for the European Commission, first as Economic Advisor to the Director-General for Economic and Financial Affairs, and then as Principal Economic Advisor to President Prodi, also heading his Economic Advisory Group. In 2004, he published 'An Agenda for a Growing Europe', a report to the president of the Commission by a group of independent experts that is known as the Sapir report. After leaving the Commission, he first served as External Member of President Barroso’s Economic Advisory Group and then as Member of the General Board (and Chair of the Advisory Scientific Committee) of the European Systemic Risk Board based at the European Central Bank in Frankfurt.

  André has written extensively on European integration, international trade, and globalisation. He holds a PhD in economics from the Johns Hopkins University in Baltimore, where he worked under the supervision of Béla Balassa. He was elected Member of the Academia Europaea and of the Royal Academy of Belgium for Science and the Arts.

In early 2020, the COVID-19 pandemic upended life as we knew it. One of the largest impacts was on the economy, which suffered its most significant setback since the Great Depression. Yet with vaccine rollouts accelerating and warm weather on its way, hope is definitely on the horizon.  

At N26, we want to build a better banking world for everyone. Part of that is diving deep into economic topics that impact our customers, and spotting trends that help us create meaningful solutions for them. That’s why we teamed up with the ifo Institute for Economic Research to launch the ifo-N26 Economic Monitor, showing how private income, spending, and savings across Europe have been affected by the pandemic. 

We’ve compiled our findings in a new report on the economic impact of coronavirus in Europe over the past year, and the financial challenges that our customers are facing today. Combined with N26’s in-depth insights on evolving customer habits, the report paints a picture of the economic recovery across Europe’s four largest markets—Germany, France, Spain, and Italy. And we have good news—the results are even better than you might expect. Read on to find out what we learned.  

What we’ve learned about the economic impact of the coronavirus

There’s no sugarcoating it—last year was hard on the economy. However, we discovered that consumer spending bounced back quickly. Although spending dropped between 50% and 60% across Germany, France, Italy, and Spain during the first lockdown in April 2020, it stabilized across all four markets as the year went on. Here’s what our research found: 

• After dropping to 60% below typical spending in the first lockdown, Germany reached about 85% of its pre-pandemic spending in the second lockdown—a recovery of +42% 
• France made the highest jump in spending recovery, rising to 80% after dropping about 50% in the first lockdown—making a +60% recovery 
• In Spain, spending dropped to 50% below average in the first lockdown and then went up to 75% in the second lockdown—showing a recovery of +50%
• Spending dropped to 50% below average in Italy during the first lockdown and then rallied to about 70%—a recovery of 40%

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The German economic recovery was the most impressive, with consumer spending today just 15% short of its pre-pandemic levels. Spain fared well too—after spending dropped to 50%, it jumped back up to 75% of its usual average by November. 

The French also have cause for celebration, where consumer spending increased the most of all countries between the two lockdown periods. After an initial drop to 50% of pre-pandemic spending, it rose 80% between the first and second lockdown. Finally, after being hit particularly hard by the coronavirus, even spending in Italy has improved, and they’re now back up to 70% of pre-pandemic levels—an impressive recovery of 40%. No matter how you spin it, the economic signs are encouraging to say the least. 

How the coronavirus pandemic affected consumer saving

If that doesn’t have you feeling hopeful, there’s even more good news. Despite the impact of the coronavirus on the economy, our study found that consumer savings increased sharply in 2020 across all four markets. 

A year after the first lockdown, European customers have accumulated savings throughout 2020 and the start of 2021, most likely due to multiple lockdowns and the increased health risks that impacted spending. Residents of Germany and Spain saved the most, with German customers saving 42% more at the end of 2020 compared to January 2020, which accelerated further to 50% by the end of March 2021. Spanish customers followed closely, saving 38% more than in the year prior, and 42% more by the end of March 2021. French and Italian customers also put more money away than usual, both saving 30% more compared to January 2019. Notably, N26 also saw an increase in the use of Spaces, our money-saving sub-accounts. 

The coronavirus economy trends that are here to stay 

With vaccinations underway and European markets on the mend, there are lots of reasons to feel optimistic. Plus, the coronavirus pandemic has also accelerated some lifestyle changes that many have embraced, like increased access to working from home. Our own research at N26 also found that contactless and mobile payments—an easy, hygienic alternative to cash—increased among European customers. In Spain, the use of mobile payment methods like Apple Pay and Google Pay jumped to 79%, while we also saw a 74% increase in mobile payments in France. 

As a 100% mobile bank, we’re not surprised that these trends are catching on. In fact, we’ve always believed in creating a banking solution that’s easy, safe, and convenient. That’s why every N26 bank account offers a contactless Mastercard enabled for cashless payments, online transactions with real time push notifications, and more—all right from your smartphone. Plus, if your pandemic savings have inspired you to keep putting away money for a rainy day, we’ve got you covered with N26 Spaces—our unique saving feature that lets you save money easily, whether for a post-covid vacation or a larger purchase down the line. No matter who you are or how you spend, N26 is by your side as we embark on this next, more hopeful chapter.

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As the economy bounces back from COVID-19, N26 is here to help you take control of your finances. Forget carrying around cash or even a bank card—simply make cashless payments right from your smartphone in seconds. With N26, online transactions and payments are simple—and with instant push notifications after every transaction, you’ll never have to wonder about your account balance. Plus, set money aside with Spaces sub-accounts to save for the unexpected, or just a lavish vacation as soon as lockdown ends!

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