Figure 1 – Vaccine economics (example Germany)
The accumulated costs to-date associated with the vaccination delay already exceed the total grants that we expect the EU recovery fund to disburse in 2021. The economic fallout from a delayed return to normalcy calls for a “whatever it takes” sequel. Policymakers will continue to have to run the show in 2021-22. Expect fiscal policy support – which governments had hoped to reduce in most European economies in 2021 – to remain aggressive as public safety nets are prolonged and reinforced to prop up household incomes and keep a lid on long-term scarring of the economy.
The ECB meanwhile will be sure to continue to provide cover to EU governments’ fiscal responses. PEPP still has an unused capacity of around EUR1trn but another ammunition boost to the tune of EUR500bn would probably be necessary in 2021 to ensure favorable financing costs are maintained. The vaccination delay will hence further accentuate the lingering Covid-19 effects on the economy by reinforcing fiscal dominance, further strengthening the role of the state in economic affairs and providing another boost to debt burdens and central bank balance sheets. The expected economic recovery detour, thanks to the delayed vaccination rollout, is even on course to eclipse Europe’s Hamiltonian trial balloon moment: The cost of the vaccination delay to-date already exceeds the EUR50bn in grants we expect the EU recovery fund to disburse in 2021.
Economic spillover effects could fuel centrifugal political forces. Given insufficient progress on the vaccination front by mid-2021, the EU will need to maintain restrictions in place to avert a third wave and in turn a triple-dip. Political discontent is likely to skyrocket once countries including Israel, newly-departed EU member Britain and/or the US enter a consumption-led growth spurt in the second half of 2021. Should the EU face a delayed return to normalcy, confidence in the European project stands to suffer a substantial blow. In particular, we are concerned about the risk of a notable increase in political uncertainty and polarization – at the national as well as the European level:
Figure 5 – Approval of government Covid-19 crisis management (in %)