• Daily confirmed cases of coronavirus (Covid-19) increased rapidly in Europe in October, with the EU average rising from 94 cases per million on October 1st to 355 cases per million on October 28th.

• The dramatic rise in case rates threatens to overwhelm health services, leading to new restrictions on economic and social activity, and the imposition of more extensive national shutdowns in France and Germany.

• We assume that other badly affected countries in Europe will follow France and Germany and impose national-level, partial lockdowns.

• Wide-ranging restrictions are likely to remain in place in most countries in Europe until the end of the first quarter of 2021, and perhaps beyond.

• Governments will aim to keep industry and services working as much as possible, but new restrictions will negatively impact growth in the fourth quarter of 2020 and the first quarter of 2021.

• The impact of these measures is likely to be less damaging than that of the lockdowns implemented in Spring 2020, with services-dominated economies being worst affected.

The second wave is affecting most countries in Europe, and is more evenly spread than the first. Countries in central and eastern Europe, which were largely spared in the first wave of the pandemic owing to swift lockdowns and border closures, have registered a dramatic rise in cases. Other countries in western Europe that were hit hard in the first wave, such as Belgium, Spain and the UK, have seen caseloads rise dramatically as well. A handful of countries, including Greece, Denmark and Germany, which seemed to be performing will in both the first and second waves, began to face a precipitous rise in cases by late October.

The limits of regionalism

Until the final week of October, governments largely pursued a range of less intrusive interventions, which entailed some combination of mask-wearing mandates, curfews for the hospitality sector, limits on the number of people that can meet and restrictions on household interactions. Governments have also been imposing stricter regulations on regional hotspots, including on hospitality and leisure activities, household mixing, and non-essential movement in and out of the area.

This has led to increased frictions between central and local governments over the imposition of such local lockdowns, financial support and the administration of contact tracing systems. It has also led to significant policy confusion in countries such as Spain and the UK, where the local and national governments are controlled by different political parties that are looking to avoid responsibility for unpopular measures. The unprecedented nature of the crisis has also required greater central government intervention in local communities, which can be less effective in highly centralised jurisdictions such as France and the UK where local authorities have less capacity, and has required more heavy-handed intervention than normal by central governments in more decentralised jurisdictions such as Spain and Italy. Aside from targeted interventions when the national transmission rate was very low, allowing for robust contact tracing in the affected area, the success of local lockdowns has been limited.

Governments are reluctant to reimpose lockdowns, but hospitalisation rates are forcing their hand

Leaders across Europe have been reluctant to impose full lockdowns (the closure of non-essential retail and all hospitality, and recommendations to citizens to stay home as much as possible). Despite its relatively low comparative rate of infection, Ireland was forced to return to lockdown by the formal recommendation of its scientific advisory team, which triggered a significant political backlash before being adopted. The Czech Republic announced a de facto lockdown on October 22nd, with France set to follow suit on October 31st and Germany on November 2nd. These moves by France and Germany will put pressure on other countries such as Belgium, Italy, Spain and the UK to follow suit.

Death rates have been climbing, albeit remaining below Spring levels, but the limiting factor for governments will be the capacity of healthcare systems. Should these be overwhelmed, the death toll will increase as people are unable to get routine care, as well as coronavirus treatment. Most local lockdowns were implemented when healthcare capacity in the affected region was approaching unsafe levels. Cross-country comparisons of hospitalisation rates should be undertaken with caution, as the capacity of healthcare systems varies significantly across countries, local hotspots can easily be overwhelmed even as national average capacity levels appear moderate, and figures are generally also reported with a lag of up to two weeks. However, data already show hospitalisation rates spiking sharply from their summer lows (see chart). In western Europe, cases initially rose among younger people, who are less likely to need hospital care, but that is now changing. Hospitalisation rates in some countries have doubled or tripled in October compared with their summer levels, but so far remain below the levels seen in March. Meanwhile, the Czech Republic is on track to reach the hospitalisation levels achieved in the UK during its peak, and Poland and Hungary are on a similar trajectory. Given the generally less robust healthcare systems in eastern Europe, these countries are likely to require more severe restrictions.

The economic fallout may be more limited the second time around

We assume that the economic impact of this second wave of restrictions will be less severe than during the spring. We do not expect lockdowns that will forbid people from leaving their homes, as the risk of outdoor transmission has been found to be low. Additionally, outside of sectors dependent on gathering people together such as events, hospitality and tourism, workplaces have either adjusted to remote working or developed ways to work in a more coronavirus-secure way, limiting the disruption in sectors such as construction and manufacturing. As a result, we are also unlikely to see the same supply-chain disruptions that took place in the first lockdown. This will benefit the healthcare system itself, as supply chains for relevant medical equipment have been established and suppliers have increased their capacity. Governments have also made it a priority to keep schools open, particularly as scientific research has largely confirmed that they are not a major vector for spreading the coronavirus.

However, the retail, hospitality, tourism and events industries are likely to be either shut down entirely or to have to operate at a severely reduced capacity until March 2021. As a result, countries that are highly dependent on these industries, including Spain, Italy and the UK, are likely to experience a more significant hit to GDP in the fourth quarter and will also require greater fiscal borrowing to support industries that have been forced to close

What’s the exit strategy?

Opinion polls generally suggest that the public is in favour of tightening restrictions if cases are rising exponentially. However, the return to lockdowns has triggered a backlash. Protests have broken out in Germany, Italy, Spain and elsewhere against further closures. There are signs of “pandemic fatigue” and a significant degree of non-compliance with stricter rules, especially in countries where wage support has been further tapered.

The purpose of the latest regional and national shutdowns has not always been clearly articulated. It has not been obvious whether the aim was to keep the virus’s reproduction (R) rate below 1, break the chains of transmission outright or to prevent hospitals from getting overwhelmed. A political priority for some governments may be to reduce infection levels sufficiently before the Christmas holidays. However, even if these measures are successful in the short term, there is likely to be a resurgence of the infection rate when measures are relaxed, and month-long lockdowns alone will not prevent a further resurgence in 2021.

Governments have pinned their hopes on significant optimism within the scientific and medical community about improved medical treatments and vaccines. From spring 2021, scientists believe that the combination of improved treatments and warmer weather will reduce the spread and severity of the coronavirus, while vaccines could be rolled out over the course of 2021. In this scenario, from March 2021 the risk of hospitals being overwhelmed will be reduced. However, this outcome is subject to a number of downside risks. If a safe and effective vaccine does not arrive or offers only partial protection, or if a mass vaccination campaign does not succeed, the strain on hospitals will persist, weighing on the European economy and health system into 2022. Fiscal costs would also become prohibitive, as countries are unable to maintain present levels of spending indefinitely, resulting in larger debt burdens in wealthier west European countries that already have high debt/GDP ratios, and straining the borrowing capacity of east European EU member states.

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