# COVID-19 crisis: economic outlook

• Antonio Montilla
Ricard Murillo Gili
• Jordi Singla
• Tiago Belejo Correia
• José Ramón Díez
• Clàudia Canals
• Javier García Arenas
• Enric Fernández
• Paula Gonçalves
Daniel Belo
Teresa Gil Pinheiro
• Oriol Aspachs
Àlex Ruiz
• Pablo Pastor y Camarasa
Clàudia Canals
Javier García Arenas
Eduard Llorens i Jimeno
• Álvaro Leandro
Eduard Llorens i Jimeno
• Daniel Belo
• Javier García Arenas
• Clàudia Canals
• Oriol Aspachs
• Oriol Aspachs
• Javier García Arenas
• Oriol Carreras Baquer
• Oriol Aspachs
• Teresa Gil Pinheiro
• ## Evolución de la desigualdad en tiempo real y efectividad del estado del bienestar para amortiguar el impacto de la crisis

España
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Oriol Aspachs (CaixaBank Research), Ruben Durante (ICREA-UPF, IPEG y Barcelona GSE), Alberto Graziano (CaixaBank Research), Josep Mestres (CaixaBank Research), Jose G. Montalvo (UPF, IPEG y Barcelona GSE) y Marta Reynal-Querol (ICREA-UPF, IPEG y Barcelona GSE).

Oriol Aspachs
Alberto Graziano
Josep Mestres Domènech
España
COVID-19
Políticas económicas contra la COVID-19
Crisis COVID-19: perspectivas económicas
• Álvaro Leandro
• Clàudia Canals
Oriol Carreras Baquer
• Clàudia Canals
Oriol Carreras Baquer
• Clàudia Canals
Oriol Carreras Baquer
• Vânia Duarte
• Clàudia Canals
• Oriol Aspachs
• Javier García Arenas
• Oriol Aspachs
• Javier Ibáñez de Aldecoa Fuster
Eduard Llorens i Jimeno
• Javier García Arenas
• Oriol Aspachs
Ruben Durante
Alberto Graziano
Josep Mestres Domènech
Jose G. Montalvo
Marta Reynal-Querol
• Oriol Aspachs
Ruben Durante
Alberto Graziano
Josep Mestres Domènech
Jose G. Montalvo
Marta Reynal-Querol
• Oriol Aspachs
Ruben Durante
Alberto Graziano
Josep Mestres Domènech
Jose G. Montalvo
Marta Reynal-Querol
• Enric Fernández
• Oriol Aspachs
Ruben Durante
Alberto Graziano
Josep Mestres Domènech
Jose G. Montalvo
Marta Reynal-Querol
• Luís Pinheiro de Matos
Ricard Murillo Gili
• Àlex Ruiz
• Javier Ibáñez de Aldecoa Fuster
Eduard Llorens i Jimeno
• Álvaro Leandro
• Oriol Carreras Baquer
Javier García Arenas
• ## A green, social and digital recovery

catalanspanish

## NGEU: capacity for transformation and macroeconomic impact

José Manuel Martínez Martínez
Rita Sánchez Soliva
16 Jul 2021

At this point in the pandemic, no-one is in any doubt that the economic scenario largely depends on how the health situation will develop. After a period of relative normality during the summer, a large number of European countries have had to step up restrictions on people’s movements and business activity. The economic impact of this second wave is considerable, although clearly less than the effect of the strict lockdowns imposed in Q2. This situation has worsened the economic outlook for the beginning of 2021, although the outlook for the spring is more promising with hopes being placed on the availability of a COVID-19 vaccine and other measures to help strengthen the health strategy (such as the low-cost, rapid testing of large numbers of the population).

Activity in Spain’s real estate market is recovering from its extraordinary slump during the first lockdown. In Q3 2020, house sales and new building permits recovered much of the ground lost, a positive trend we expect to consolidate in 2021. Moreover, the impact of the crisis on house prices has been relatively moderate so far, although we expect these will continue to adjust in the latter part of 2020 and the first half of 2021. In particular, CaixaBank Research’s new house price forecasting models at the level of province, based on large amounts of information (big data) and applying machine learning techniques, predict that house prices will fall in 7 out of 10 Spanish provinces in 2021 and grow very moderately in the rest.

However, it is important to remember that the economic impact of COVID-19 is huge and the effects of the pandemic on the sector will take time to disappear completely. The Recovery Plan for Europe, or Next Generation EU (NGEU), allocated a substantial sum of 750 billion euros, will be decisive in helping to boost the recovery. One of the EU’s main targets, which this recovery plan aims to support significantly, is the ecological transition to become climate-neutral by 2050. In the EU, buildings are responsible for emitting about 40% of the gases that cause global warming. The involvement and commitment of the construction industry is therefore essential to reduce greenhouse gas emissions to the agreed targets, while more energy-efficient «smart» buildings also support another of the Commission’s key targets: digital transition.

These European funds represent a unique opportunity to modernise Spain’s economy, which will receive around 72 billion euros in non-refundable transfers between 2021 and 2026, equivalent to 5.8% of its GDP in 2019. About 6% of the European NGEU funds will be aimed at renovating housing, tripling public investment in this area. In particular, the government plans to recondition 500,000 homes between 2021 and 2023. This target, if achieved, would be very positive for the sector but it is highly ambitious since it requires multiplying the current reconditioning rate by six in just three years.

In addition to renovations, another priority for housing policy over the coming years is the improvement of social housing. The severe economic and social impact of the COVID-19 crisis has highlighted the need to provide a large number of rented social housing to resolve the current shortage and be able to ensure the most vulnerable sections of the population have somewhere to live. Policies that should drive a green, social and digital recovery.

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• Laura Becerra
Clàudia Canals
Oriol Carreras Baquer
• Enric Fernández
• Oriol Aspachs
• Jordi Singla
• Enric Fernández
• Oriol Aspachs
• Vânia Duarte
• Enric Fernández
• Oriol Aspachs
• Eduard Llorens i Jimeno
• Álvaro Leandro
• Paulo Eduardo Carlos
• Luís Pinheiro de Matos
Javier García Arenas
• Oriol Aspachs
• Álvaro Leandro
Eduard Llorens i Jimeno
• Teresa Gil Pinheiro
• Eduard Llorens i Jimeno
• Javier García Arenas
• Àlex Ruiz
Beatriz Villafranca Serrano
• Javier García Arenas
Alberto Graziano
Josep Mestres Domènech
Eduard Llorens i Jimeno
• José Ramón Díez
• Oriol Aspachs
• Vânia Duarte
• Clàudia Canals
Antonio Montilla
• Luís Pinheiro de Matos
• José Ramón Díez
• José Manuel Martínez Martínez
Rita Sánchez Soliva
• Teresa Gil Pinheiro
• Sergio Díaz
• Javier García Arenas
• Oriol Aspachs

## The fiscal response to COVID-19 in Europe:will it be enough?

European countries have announced a large number of fiscal measures to cushion the blow of the pandemic. In 2020 the fiscal impulse will be similar across the major countries but the differences lie in the automatic and discretionary components of fiscal policy in each state.

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September 3rd, 2020

•  European national governments have responded to this crisis by announcing a battery of fiscal measures of various different types and sizes.
• The figures announced suggest a disparate national response among the major euro area economies. Nevertheless, they are not a good measure of the fiscal stimulus in 2020.
• Based on public deficit forecasts, we estimate that the national fiscal stimuli in 2020 will be of a similar scale in Germany, Spain, France and Italy. However, there are significant differences between the automatic and discretionary contributions from fiscal policy in each country.

The COVID-19 epidemic is proving to be an unprecedented economic shock for the European economy (according to our forecasts, euro area GDP will shrink by around 10% in 2020). In this context, a rapid, robust and effective economic policy response is essential to cushion the heavy toll it is taking on many families and firms, and to support the economic recovery. The ECB has once again been the first player to move decisively and effectively, but monetary policy alone will not be enough. Fiscal policy must also play a leading role.

What fiscal measures have been announced in Europe?

In this regard, the governments of the various euro area countries have announced a large number and wide variety of fiscal measures since this crisis began. We summarise these measures in the table, classifying them into those with a direct impact (such as VAT cuts or temporary staff furlough measures like Spain’s ERTEs), tax deferrals and guarantees for firms. This table highlights the differences in the scale and strategies of the fiscal responses between the various countries. In Italy, for instance, the direct-impact fiscal measures announced so far (3.4% of GDP) have been much smaller than those announced by Germany (8.3% of GDP), while the amount of the guarantees proposed has been considerable. In Spain, the measures in all three categories seem timid compared to the rest of the major euro area countries.

While the figures in this table receive considerable media attention, there are several reasons why they are not, in actual fact, an accurate measure of the fiscal stimulus in 2020 in each country. Firstly, not all the measures announced will have an impact this year. For example, part of the German stimulus package includes long-term green investments with a budgetary impact well beyond 2020. Also, of the large quantity of state guarantees announced in each country, only a fraction has actually been used.1 In addition, the table only reflects discretionary measures, so it does not provide an indication of the magnitude of the automatic stabilisers in place in each country (such as the automatic increase in spending on unemployment benefits or the fall in tax revenues), which also form part of the fiscal policy contribution to the stabilisation of the economy.

• 1. See Anderson, Papadia and Véron (2020). «Government-guaranteed bank lending in Europe: Beyond the headline numbers». PIIE Realtime Economic Issues Watch, July 2020.
How can we estimate the fiscal stimulus in 2020 in each country?

One way to estimate the effective fiscal stimulus in 2020 in each country is to compare the projected fiscal balance in 2020 with that of 2019. According to the latest forecasts from the consensus of analysts (July 2020), the deterioration in the fiscal balance in 2020 will amount to 8.6% of GDP in Germany, 8.1% in Spain, 7.6% in France and 9.4% in Italy.2 This suggests that the fiscal stimulus of the major economies in 2020 will, in fact, be more similar than one might be led to believe based on the measures summarised in the table.

The deterioration in the fiscal balance is not only due to discretionary measures taken during the crisis, but also to the economies’ automatic stabilisers. As an example, countries with a more generous unemployment system and a more acute increase in unemployment will automatically see a greater increase in their public spending (i.e. an automatic fiscal stimulus), without having to take any further action. We can estimate the contribution from the automatic stabilisers by using the historical relationship between changes in the fiscal balance and the economic activity of each country.3 In this way, we can distinguish what portion of the deterioration in the fiscal balance is due to the automatic stabilisers and what portion is due to new discretionary measures taken during the crisis. According to our calculations (see chart), a large part of the fiscal boost in Spain and France will be automatic, while in Italy, and above all in Germany, the discretionary stimulus is more important. In fact, while the overall deterioration in the fiscal balance is similar among the different countries, the breakdown between automatic and discretionary stimulus once again reveals significant differences.

• 2. These figures are calculated using consensus forecasts from Focus Economics. While the change in the primary balance would be a better measure of the fiscal stimulus, information at this level of detail is not available. Nevertheless, according to the European Commission’s own estimates, interest expenditure will remain relatively stable between 2019 and 2020, so the change in the total balance should be similar to the change in the primary balance.
• 3. i.e. using the relationship between the fiscal balance as a percentage of GDP and GDP growth. Specifically, for each country, the contribution from the automatic stabilisers to the change in the fiscal balance is the product of the semi-elasticities estimated by the European Commission (Mourre, Poissonnier y Lausegger, «The semi-elasticities underlying the cyclically-adjusted balance: an update & further analysis») and the fall in GDP in 2020 projected by the analysts’ consensus (according to Focus Economics). The semi-elasticity is calculated as follows: $$\varepsilon=d\frac{\left({\displaystyle\frac\beta\gamma}\right)}{\displaystyle\frac{d\gamma}\gamma}$$, where B is the fiscal balance and $$\gamma$$ is GDP. Finally, we estimate the contribution from the discretionary measures as a residual: the difference between the change in the total balance and the contribution from the automatic stabilisers.
The effectiveness of the fiscal measures

Finally, the effectiveness of the measures taken, and not just their size, will be key to how they impact growth. During the crisis, the most efficient measures will be those that manage to maintain the productive fabric of the economy. In this regard, the temporary workforce reduction programmes, such as ERTEs in Spain, Kurzarbeitgeld in Germany and chômage partiel in France, which represent a large part of the increase in expenditure in these countries, play a particularly important role, as they maintain the labour relations that exist between firms and their workers and thus prevent a sharper and more persistent increase in unemployment. During the recovery phase, however, it will be important to take measures that help the economy to recover to its potential level as quickly as possible. Furthermore, these measures should facilitate the economies’ transformation towards more sustainable models that are also more productive. Lastly, given the important economic links between European economies, one of the key factors for ensuring that the fiscal stimulus is effective will be for it to occur in a coordinated manner. Indeed, it is widely documented that a fiscal stimulus in one euro area country generates positive externalities in the rest of Europe’s economies.4 In this respect, the suspension of European deficit limits is a positive development, since these restrictions are not compatible with the fiscal support required in these circumstances. Finally, the recovery plan agreed in July by the European Council, which includes some 390 billion in grants to Member States, will also provide important support for the recovery of the European economy and represents an addition to the national fiscal responses.

• 4. See Dabla-Norris, Dallari and Poghosyan (2017). «Fiscal Spillovers in the Euro Area: Letting the Data Speak». IMF Working Paper November 2017.
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