Spain ‒ 2020-2021 Scenario: Severe economic contraction
The GDP contraction as a direct result of lockdown is concentrated in the first half of 2020. We expect to see the economy gradually return to normal during the summer months, as restrictions on manufacturing to contain the pandemic are eased and households and businesses loosen the purse strings and boost spending after six months of pent-up demand. But, the rebound will be partial. Uncertainty (new disease hot spots, reimposition of lockdown and slow pick-up in activity) will weigh on consumers and businesses alike. Households will continue to increase precautionary savings and businesses will delay decisions on hiring and investment.
Eurozone – 2020-2021 Scenario
Assuming there is no second wave of infections, our growth outlook for the Eurozone stands at 8.1% in 2020 and +5.5% in 2021. This means a marked V-shaped quarterly curve between the second and third quarters of 2020: a mechanical rebound in growth in the second half of 2020, followed by a moderate, incomplete recovery in 2021. At the end of our forecast horizon, Eurozone GDP is 2% below its 2019 level. This gap will be different in each country: from zero to Germany to negative for other major economies (-2.6% for France, -4.4% for Italy, -5.5% for Spain).
Germany – 2020-2021 Scenario: coronavirus brings growth to a sudden halt
Germany will not escape an economic recession this year despite a confinement period limited to one month and a massive support plan for companies and employees. GDP decline is estimated at 6.1% in 2020 due to hard-hit industrial production, shrinking domestic demand and widely reduced global demand. It will take until the second half of this year to see a recovery in activity which, if continued, should allow growth to reach + 5% in 2021.
Italy – Monthly News Digest
International trade in May 2020. Industrial output and retail sales recovered in May after two consecutive months of decline in March and April. Increase in unemployment in May. Do households and companies see the light at the end of the tunnel? Overview of sector-based national accounts. Towards the appeasement of employer discontent? The unfortunate Estates General of Giuseppe Conte. Decline in employment and decline in unemployment.
Generation COVID: a sacrificed generation?
The Great Recession of 2008 and the sovereign debt crisis made it particularly hard for the “2010 generation” – the first victim of the sharp labour market downturn – to join the labour force. According to a number of studies by Céreq in France, only a minority of young people with few if any qualifications at the time managed to finally secure a permanent contract, and even then only after five years. Meanwhile, career prospects darkened for the most highly qualified young people, who found it harder to secure management positions, with more of them taking jobs for which they were overqualified and at lower pay than their particular qualifications had previously commanded. In Europe, it took more than a decade for hysteresis effects to be erased and youth unemployment to return to pre-crisis levels. Even so, young people remain at a significant long-term disadvantage in the labour market, with youth unemployment standing at twice the average rate of unemployment. The challenge of employment for young people is not only about creating new jobs; it also concerns the quality of jobs, with the younger generation overrepresented in the new “platform economy”, synonymous with casual labour and less job security. Young people are also hit particularly hard by social exclusion, with one out of six – rising to one out of four in Italy and Greece – unoccupied, out of work, outside the education system and lacking qualifications (known as NEETs). This form of intergenerational injustice is reflected in poverty figures: the divide between young people and pensioners is deepening, with a higher proportion of young people suffering severe material deprivation than their elders (defined as not meeting four of nine essential criteria, including in particular the ability to pay one’s bills, rent and heating costs, have a high-protein meal every other day, buy a washing machine, etc.).
With the coronavirus crisis, young people are now “disproportionately hit by multiple jolts ranging from disruption in education and training to job losses, not forgetting difficulties finding work”, warns the International Labour Organization. As collateral victims of the pandemic, these young people are liable to suffer another long-term blow to their working lives.
Indeed, being unemployed while young can have serious consequences. Traditionally, a first job enables a young person to put his or her training or qualifications into practice, supplementing them with initial experience of the working world. Without such opportunities, young graduates are liable to lose their skills and encounter increasing difficulties the longer they remain unemployed, perhaps with long-term consequences for their career and earnings potential. For the least qualified young people, not having access to a first job deprives them of opportunities to learn on the job and acquire new skills, and risks alienating them from the labour market for a long time to come, making them vulnerable to long-term social exclusion. Others have no choice but to make a living off poorly paid odd jobs with variable hours; such insecure, vulnerable conditions can easily knock your self-esteem and impact the course of your life.
This mass youth unemployment has consequences that go beyond the economy. It poses a threat to future growth, with devalued human capital translating into lower productivity as skills are eventually lost for lack of use or become ill-suited to a technologically fast-changing world. The capacity to innovate is also weakened in countries with ageing populations, which tend to be conservative and where risk aversion is higher and people tend to save more. And it goes without saying that depressed career prospects tend to translate into lower pay and a loss of purchasing power, with the result that young people are likely to spend less in future. The resulting chronically weak demand, combined with a lower investment requirement, risks plunging economies into anaemic growth for a long time to come. As the number of young people in work and/or earning enough to meet the higher tax bills needed to repay public debt resulting from the crisis declines, this also places a burden on the public purse, with the sustainability of funded pension schemes under pressure and social and healthcare costs increasingly difficult to meet. Lastly, future decisions will be affected, with new households not formed, birth rates in the doldrums and the housing market slowing.
One can only hope that the return to growth will suffice to resolve the problems facing young people. This is a necessary condition but probably not a sufficient one. Europe has a duty to future generations. Access to employment and social inclusion for young people are the very essence of the socioeconomic compromise that binds the generations together. There is thus an urgent need to make the fight against youth unemployment a priority, lest the reluctantly named “generation COVID” become a sacrificed generation.
 Centre d’études et de recherches sur les qualifications (Centre for surveys and research on qualifications).
 Not in education, employment or training.
 ILO Observatory: COVID-19 and the world of work, Issue 4, 27 May 2020.
France – Impact of Covid-19 : what prospects does the French economy have for recovery?
Given the estimated economic cost of the lockdown and still-sparse information about the resumption of business once restrictions were lifted, we expect French GDP to decline by -10.2% in 2020. This record contraction should be followed by a significant rebound in 2021 (+7.5%). After contracting 5.3% in the first quarter, GDP likely declined 17% in the second quarter; this quarter was marked by six weeks of lockdown, compared to just two in the previous quarter. Supportive measures should preserve productive capacity to a large extent and will also protect employment and incomes, in order to allow economic activity to restart as quickly as possible.
What can bankers learn from Nikolai Gogol?
The long sweep of history doesn’t often seem to be of much use in helping a credit committee reach decisions! While this is true in steady-state conditions, i.e. at times when things are economically and politically “normal”, it doesn’t hold true when the weather turns rough. On the contrary, when the forecasting universe becomes volatile or anxiety-inducing, history can help us identify some points of stability. This is particularly true in the world of geopolitics. Furthermore, when trying to work out where these foundational points are, it’s worth using the investigative method recommended by Max Weber to measure the true scope of a historical factor: what would have happened if it hadn’t existed? Or, to put it more succinctly, “What if?” Well, if the COVID crisis hadn’t happened, the rivalry between the United States and China would still be just as potent and formative for politics and the global economy.
From this flow three ideas that are now more or less consensual, and which thus deserve to be looked at more closely. Shifts in the consensus are always important for business and economics alike: they influence decision-makers, and therefore scenarios themselves. They’re also important because a consensus proceeds as much from a clearer view of reality as it does from a less clear desire to write about that reality. And here it’s worth considering a methodological precaution from the world of economic investigation: János Kornai has recommended that one should go back over one’s forecasting errors every ten years to identify one’s own judgement biases.
Beware the American “chinovniks”
The first idea is that the United States and China will continue to clash once the US elections are over, even if the faces and forms have changed and even if there seems to be a break in hostilities – which the market will quickly latch onto as a signal of peace. Such a state of permanent conflict, whether it is an underlying state of affairs or not, is likely for three reasons.
First, this tension arises from the inevitability of the “big story” – the story of US domination in the face of a resurgent China. When challenged, a hegemonic nation-state never relinquishes its position without a fight.
Second, populations have become even more hostile thanks to COVID-19, and the issue has thus moved into the realm of domestic politics, where it will remain for a long time to come: generational effects are a powerful force in politics. For some authors, such as George Modelski, such effects are the source of long cycles of political opinion – the geopolitical equivalent of Kondratieff cycles in economics.
Third, and this is the most objective argument, the clash is no longer driven solely by governments’ political leadership: it is baked into laws, regulations and administrative structures. Sociologists have long demonstrated that this creates both inertia that restricts forward movement and a ripple effect. Incidentally, Russian writer Nikolai Gogol was a specialist in this subject, having long ago identified “chinovniks” (officials) and their ability to influence a society… The US administration has bought into both the legitimacy (questionable as it is) of the extraterritoriality of US law and the logic of political rivalry.
Lessons from history about globalisation
The second idea shaping the consensus is that this rivalry can play out in every sector, from economics to the military, not forgetting culture, education and diplomacy; that it will be more intense in so-called strategic areas like technology, control over commodities, healthcare and so on; and that it will involve a kind of decoupling of value chains. Well, okay, but when? And how far will this go? That’s where the consensus breaks down. The most widespread view among economists is that there will be a slow process of partial deglobalisation out of which the two powers’ respective areas of influence will gradually become clearer. This projected future effectively maps out a polarised world in which the new normal could be anything from another Cold War to cooperation in some areas. And, as it happens, such a world does not appear to be incompatible with current financial structures.
However, some political analysts are more cautious – and are all too quickly labelled pessimists as soon as they step outside the consensus. Indeed, the history of declining hegemonic nation-states tends to teach us that such nation-states seek to destroy their rival powers at any cost, including by military force. Taking all this into consideration, it’s hard to say which will prevail, historical experience or the particularities of today – namely, the far-reaching economic interdependence that has arisen from globalisation. Or, indeed, the nuclearisation of the world, which is giving rise to new military rules of engagement.
Might the power of the dollar indicate a phase of geopolitical decline?
The third idea is the most important of all. COVID-19 and the social crisis currently rocking the United States have intensified a paradoxical situation: on the one hand, there is growing certainty that US hegemonic power is declining and the economic and political balance is shifting ever more starkly towards Asia; on the other, the undeniable hegemony of the dollar – even though many countries are gradually holding less and less of it as a reserve currency – serves to lock in the existing balance of power. What does history teach us? What role has money played at previous times of hegemonic tension?
Many authors – for example Giovanni Arrighi, Immanuel Wallerstein, Samir Amin and, of course, Fernand Braudel – have attempted to compare capitalism’s successive phases of expansion in trade, production and finance with geopolitical phases of world history. From their studies emerges a striking observation: “those periods when finance takes on particular importance tend to point to a new weakness in the former hegemonic power and herald its impending replacement […]. They tend to herald a relatively imminent shift in the global system of accumulation.”
This fact appears to be related to a very simple mechanism whereby economics and geopolitics each act on the other. In its initial dominant phase, the hegemonic power generates current account surpluses; however, as it finds it is unable to keep producing the most attractive goods, these surpluses turn into deficits (production being one of the prerequisites for hegemony). From there, the hegemonic power, which still holds onto its financial power, attracts the most mobile capital flows and recycles them into income-generating activities – often in the form of direct investments in its rival power! And so we come full circle: “financial expansions that reflated the power of the declining hegemonic state would have come to an end anyway under the weight of their own contradictions.” No comment. This happened to the Dutch from 1750 onwards and to the British starting in 1919… and it looks very much like the situation in America since 1977.
Many observers today have noted the geopolitical importance of the financial sphere and are calling for alternative monetary systems. These observers are found, unsurprisingly, in Russia and China, where systems are being developed to escape the clutches of SWIFT (SPFS for Russia, which already handles 18% of Russian international transfers; CIPS for China). They are also to be found in emerging countries, notably Turkey and India, where efforts are being made to develop bilateral payments in other currencies – just as Shanghai Cooperation Organisation finance ministers recommended last March. But they can also be found right at the heart of the western financial system. For example, at the famous Jackson Hole conference last August, former Bank of England Governor Mark Carney called for the creation of a digital currency based on a basket of currencies. His choice of name for this currency was most interesting: he called it a “synthetic hegemonic currency” (SHC). The United States had better be wary of its allies as well as its rivals…
Tania Sollogoub - firstname.lastname@example.org
 A Hungarian economist who came up with the theory of soft budget constraints.
 “Never had anyone given such a comprehensive lesson in pathological anatomy on the Russian official.” – Aleksandr Herzen (1851), Du développement des idées révolutionnaires en Russie
 Hegemonic powers since the 15th century: Portugal, the Netherlands, Great Britain and the United States.
 Philippe Norel (2009), L’histoire économique globale, Seuil.
 Giovanni Arrighi and Beverly J. Silver (2001), “Capitalism and world (dis)order”, Review of international studies, Volume 27.