By Jack French and Chris Ball (Ed.), The Quinnipiac University Economics Research Team
Published: 23 April 2020
CEE vs US and Western Europe
The Central European region has generally had a lower infection rate than the rest of Europe and the United States. We’ll leave the debate as to why up to epidemiologists and other health science researchers. This report instead simply aims to put the region’s infection rates and policy responses into a broader global perspective.
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Not surprisingly, Central Europe’s most populous country, Poland, has also had the highest number of cases in the region, as of April 23rd. As a percentage of the country’s total population, the Czech Republic has had the highest number of cases with Romania, Poland, Slovakia, and Hungary following. (See data table below)
In terms of policy response, Poland has spent the most as a percent of GDP by far, at about nine percent of GDP. The Czech Republic and Romania are next, each spending roughly two percent of GDP. Hungary and Slovakia are on the low end of the spectrum with spending around one percent of GDP.
All of the countries have been implementing a mix of fiscal and monetary policy in response to the economic impact of the virus. Policy packages range mostly from about one percent of GDP in the Slovak Republic to around four percent of EU27 GDP in the case of the massive fiscal response from the European Union itself. With more cases both in percentage of and total population terms, the US is far outspending any other nation with a series of relief acts totaling more than ten percent of GDP at approximately two trillion USD so far.
Fiscal policy has largely focuses on three areas worldwide: first, financing the health costs of the crisis (funding hospitals, buying respirators, financing research, etc.), second, financing the heavy burden of unemployment through typical channels and special channels like direct-to-household transfer payments, and, thirdly, providing temporary financial support to businesses so that they survive the crisis and are able to re-hire employees quickly once health concerns subside. Common themes in this last category are direct-support, loans and forgivable loans for businesses forced to close and deferment of certain taxes.
Other measures have aimed directly at households and included extending loans, halting interest payments, and some direct payments or wage coverage. Measures aimed directly at households have included extending loans, halting interest payments, and some direct payments or wage coverage.
Slovakia’s response includes support for 80% of wages for companies that have been forced to close. Romania is offering partial wages for parents who have had to stay home due to school closure. The Czech Republic’s income support includes 100 percent for those working in businesses forced to close and 60 percent for employees sent into quarantine.
On the monetary side the main focus to date has been on maintaining liquidity. With normal commerce coming to a halt, financial funds stop circulating and this can cause liquidity crises for business and financial institutions. This has largely been done through a series of crisis-specific actions such as asset repurchasing programs to help maintain liquidity for financially important sectors.
The Hungarian central bank rolled out a quantitative easing program while the Polish central
bank is purchasing Polish treasury securities on the secondary market and has lowered the required reserve ratio for banks.
A secondary objective for monetary policy has been to lower interest rates which was done in a largely coordinated fashion across the central banks in the region. This is to provide maximum support to the economy at the moment and not further add to the crisis with restrictive policy rates. The coordination was done to avoid large difference in rate changes across countries that could unintentionally cause exchange rate or financial capital movements.
Finally, central banks and fiscal policy makers are coordinating efforts to ensure all policy measures work together and also to ensure there are funds from central banks should fiscal authorities need a source of funds other than bond sales.
Is Policy Proportional to the Challenge?
There have been two kinds of policy responses to the crisis. The first response has focused on the impact of the virus on human health. The second type of policy response has focused on the economic impact.
When looking at the number of confirmed cases and the associated responses, there are several correlations that one might expect to see. Countries with the earliest, strongest responses would likely see less cases. This would be true specifically for the general responses such as closing schools and nonessential businesses that are aimed at slowing the spread of the virus rather than economic relief. How successful these policies have been is hotly debated and outside the scope of our economics focus.
Countries spending more on economic relief do not necessarily have to be the ones with the highest number of cases. A low number of cases could imply a high level of restrictions which would be cutting into GDP and increasing the need for fiscal and monetary response.
Causality is not as clear as one might hope. Economic policy responds to economic conditions, especially declining GDP, rising unemployment and, more importantly, the threat of such things occurring. These negative economic results could be the result of health policies like lockdowns, simple fear causing people to stay home – and how you would disentangle the effects of those two is a challenge to say the least – but also pre-existing economic conditions like the level of debt to GDP prior to the crisis, the level of GDP or unemployment prior to the crisis and so on.
We provide an initial look at the state of the region and address some of these specific factors over the coming weeks in further publications.
Hungary has 2,168 confirmed cases making up 0.022% of the population with 225 confirmed deaths. This is roughly tied with Slovakia for fewest number cases in the region in terms of percentage of total population. Since March 27th, the country has been operating under a shelter-in-place order for everything but essential business and activities.
Slovakia has the fewest cases and is spending the least (around one percent of GDP) while Hungary is spending slightly more and has the second fewest cases. Czech and Romania are spending more (roughly two percent of GDP) and both have more cases than Slovakia or Hungary. Poland has more total cases in comparison to its neighbors but has a much lower percentage of population infected than do the Czechs and the Romanians. Poland’s commitment amounts to nine percent of GDP, roughly four and a half times that of any other Central European country, suggesting they are more concerned about the economic slowdown. It is still very possible that the other countries who are spending far less will roll out additional measures as the situation unfolds.
All CEE countries have less than half as high a percentage of their population infected as Europe and some have just a tenth of the cases as a percentage of population in the US. There is a broad range of deaths as a percentage of cases from nine percent in Hungary, roughly equal to Europe and the only one higher than the US, to only one percent in Slovakia. The reason behind this is unclear, but it speaks to Central Europe being in better shape currently than Western Europe and the US.
The policy responses seen so far have been fairly similar with a mix of fiscal and monetary and a focus on both maintaining liquidity and on supporting businesses and individuals. The CEE countries have had a fairly small number of cases and are taking steps to limit the spread in addition to the economic measures. However, there is not yet a clear relationship between spending and number of cases or deaths and the economic data is not yet available to measure the true impact there either.