France and Germany are the most influential economies in the eurozone, elevated by strong trade links with the world’s biggest markets – including China. But as the coronavirus crisis puts the European economy on the brink of recession, Paris and Berlin could feel the financial pinch more than anywhere else. According to research by RaboBank – a Dutch multinational banking and financial services company – the picture for the eurozone looks bleak.
The research – carried out in March – states that a eurozone recession is very likely and cites Italy among the countries likely to face a severe impact.
It also warns that inflation in the eurozone is going to be “volatile” as supply and demand shocks work in opposite ways, but ultimately downward pressure on inflation is expected to prevail.
The key reason France and Germany could be particularly vulnerable compared to other eurozone countries is because of their exposure to supply stocks originating in China.
RaboBank’s data shows dependence on both Chinese inputs in their manufacturing industry and final goods.
Germany is among the most exposed only to be superseded by France due to the latter’s dependence on Chinese industry inputs, the report says.
In regards to total industry inputs to European countries’ GDP, France ranks highest with 3.1 percent while Germany is third with 2.6 percent.
As for imports on Chinese goods as a percentage of GDP – Germany is highest with 1.1 percent while France is third with 0.9 percent.
Even more concerning for France President Emmanuel Macron, his country ranks bottom in terms of financial-shock absorbing capacity.
The report summarises that overall Germany and Austria are most exposed to the combined demand and supply shock in China.
France meanwhile, faces more risk from the supply shock rather than the hit on demand.
Mr Macron warned last Thursday that “this epidemic, which affects all continents and strikes all European countries, is the most serious health crisis to hit France in a century”.
He announced an unprecedented closure of French educational establishments, from daycare centres to universities.
The French President added: “This is both to protect them and to reduce the spread of the virus throughout our territory.”
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As for Germany, Chancellor Angela Merkel is pushing to close the country’s borders to prevent the spread of the coronavirus.
Last Wednesday, Ms Merkel said that EU countries “should not be isolating ourselves from one another”.
The EU is divided on the issue however, as European Commission President Ursula von der Leyen said on Friday that the World Health Organisation did not consider travel bans to be effective.
She said that sealing off frontiers had a “strong social and economic impact” and would “disrupt people’s lives and business across the borders”.
Mr Macron, Ms Merkel, Ms von der Leyen and Charles Michel will discuss the coronavirus and borders today.
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