THE POST-VACCINE RISK PHASE / PROJECT SYNDICATE

The Post-Vaccine Risk Phase

Although the United States, Europe, and Britain will have vaccinated their populations by the end of the summer vacation season, it will be far too early to celebrate. As long as the virus is still circulating elsewhere, governments in advanced economies will have to keep preparing for the worst.

Olivier Blanchard, Jean Pisani-Ferry

PARIS/WASHINGTON, DC – For all the drama over sluggish COVID-19 vaccine rollouts and export restrictions, there is little doubt that the vast majority of people in the United States and Europe will have been vaccinated by summer. 

Death tolls will differ according to each country’s policy record, but the public-health situation will have become largely the same for Americans, Europeans, and Britons.

But there is considerable uncertainty about how much of pre-pandemic social life will return, and how long it will last. 

Some constraints doubtless will remain in place. 

The recovery in travel, for example, will be slow and uneven, and there will probably be “travel bubbles” – a scenario already anticipated in Australia and New Zealand, where the virus has been nearly eliminated. 

The European Union, for its part, will likely accommodate the summer travel season by introducing quarantine-free border crossing for those with vaccine passports. 

But restrictions on long-distance travel will remain.

Disparities in the pace and scope of the resumption of social activities will most likely coincide with income gaps. 

While some emerging markets will have reached high vaccination rates (Chile, Morocco, and Turkey are already ahead of the EU), most of the developing world will not have contained the virus. 

Accordingly, border controls between the vaccinated rich world and the unvaccinated poor world will probably tighten, especially if new variants continue to emerge. 

The adverse fallout will be felt most directly by migrant workers, but there will be broader consequences, such as a contraction of long-distance tourism, which will severely undercut some economies.

Moreover, globalization will be affected. 

Although barely any person-to-person contact is required to ship a container halfway around the world, the same cannot be said for managing production networks or finding new clients. 

The evidence suggests that measures altering the movement of people (such as new visa rules or the opening of new travel routes) do indeed affect trade in goods. 

Lasting obstacles to passenger travel would ultimately reduce international trade and investment, productivity, and growth overall.

More important, a full (if gradual) return to normal life will be possible only if vaccines remain effective. 

So far, they seem to be succeeding brilliantly. 

But the emergence of vaccine-resistant variants would force governments to keep severe restrictions in place, possibly with recurrent lockdowns. 

Some experts, such as Monica de Bolle of the Peterson Institute for International Economics, regard this scenario as likely. 

But even if it is only a tail risk, it demands our attention.

Surprisingly little is known about the trade-off between public health and economic activity in the context of the coronavirus pandemic. 

Scoreboards based on GDP growth rates and death tolls may generate plenty of commentary, but they are grossly misleading. 

Italy experienced sharp losses of life as well as GDP last year not because its policy response was inefficient, but because it was the first European country to be hit, and thus had to respond to the unanticipated shock with economically costly measures.

To gauge how countries have managed this trade-off – and how they might continue to do so if the pandemic persists – we have compared the week-by-week evolution of infections with economic activity, as measured by the OECD GDP Tracker. 

Before the British variant (B.1.1.7) emerged, COVID-19’s contagiousness, as measured by its “reproduction rate” (R), was about three, meaning that one infected person could be expected to contaminate three others. 

The aim of confinement measures was thus to reduce R to below one, at which point viral incidence would be diminishing rather than growing.

In the spring of 2020, several European countries managed to reduce R from three to about 0.7 within the course of a few weeks. 

Here, the corresponding reduction in economic activity varied from around 15% in Germany (where the first wave was mild) to nearly 30% in France, where construction stopped altogether and one-quarter of private-sector employees were placed on furlough. 

The treatment was effective, but it came at an extremely high economic cost.

By contrast, when Europe braced for another lockdown episode in the fall, the economic cost of public-health measures was much lower. 

R was brought down to about the same level (0.8), but the economic cost was 2-3 times lower, and the effect was remarkably uniform across countries.

The reason is that governments had learned from the first wave. 

The second-wave response was less stringent but better targeted. 

Masks and protective equipment were more widely available, and companies had learned to adapt to the restrictions. 

Some of these adaptations have proved lasting: electronic payments have received a significant boost; e-commerce is booming; and companies in affected sectors managed to do business or even thrive. 

In France, where restaurants are closed and hotels are facing severe restrictions, one out of four nonetheless reported that activity had recovered by more than half in February (and 10% said it had returned to normal).

As for the future, the recurring emergence of variants would make further adaptations more likely. 

But if these variants are more contagious, the costs will rise. 

Companies that have been kept on life support by liquidity injections and tax deferrals won’t survive, and workers still on furlough (including 4.5 million British workers in January) will either lose their skills or their jobs. 

Major efforts will be needed to help them change occupations.

The longer the pandemic lasts, the more severe the damage will be, and the higher the costs. 

A truly global vaccination rollout therefore remains vital. 

In the meantime, governments must prepare for the risk of periodic outbreaks by devising new policies to contain their social, economic, and fiscal costs.

Olivier Blanchard, a former chief economist of the International Monetary Fund, is Senior Fellow at the Peterson Institute for International Economics. He is the co-editor (with Lawrence H. Summers) of Evolution or Revolution? (MIT Press, 2019). 

Jean Pisani-Ferry, a Senior Fellow at Brussels-based think tank Bruegel and a Senior Non-Resident Fellow at the Peterson Institute for International Economics, holds the Tommaso Padoa-Schioppa chair at the European University Institute.