Deindustrialization in Europe – Time for a new Economic Model?

First, the pandemic caused supply-sided shocks hindering production: lack of materials, disrupted supply chains, workers refrained from going to work, restricted social mobility etc. It also caused structural changes in demand such as shifts from services to durable goods. Households refrained from consumption and instead accumulated excess savings.

Figure 1 shows the development of real GDP since Q42019 before the pandemic hit which we define as the ‘pre-crisis-level’ until Q2 2023 for the three largest economies of the world. We can see the severe economic slump in Q2 2022 when production was halted, and borders closed. Economic output fell by up to 15 percent in the Eurozone and roughly 10 percent in China and the US. However, after reopening the economy the rebound was strong. Many economists wondered whether the recovery is going to be V-shaped.

Policymakers reacted swiftly and initiated historic stimulus packages to keep the economy afloat. In particular, the US spent almost 25 percent of their GDP to help businesses and households during the crisis (Kunath et al., 2022). This was accommodated by a very loose monetary policy. The ECB initiated for instance two programs: Pandemic Emergency Purchase Programme (PEPP) and the Asset Purchase Programme (APP) which alone comprised more than EUR 5 trillion, doubling the balance sheet of the ECB between beginning of 2020 and end of 2021.

However, a V-shaped recovery only occurred in China where GDP exceeded its pre-crisis level already in Q2 2020, followed by the US in Q1 20201. GDP recovered more slowly in the Eurozone where the pre-crisis level was only reached in Q3 2021. Since autumn 2021 economic optimism came back based on the rebound in private consumption and an ease of restrictions in global supply chains leading to strong growth rates in the Eurozone and the US. In China, the draconian lockdowns as part of a failed zero covid policy led to a more volatile development.