Coronavirus Lessons from Europe

Posted on March 15, 2020 by Dan Mitchell

I wrote recently how government regulation and bureaucratic inefficiency are hindering an effective response to coronavirus in the United States.

And I also wrote yesterday about one foolish response from Washington to the crisis.

But what about developments in other nations? Are there lessons to be learned?

Henry Olsen, writing in the Washington Post, contemplates how Italy is very vulnerable because of stagnation, dependency, and debt.

Italy…has essentially shuttered its economy to fight its enormous health crisis. …Effectively, millions of Italians are out of work. These actions would shock any economy. But Italy’s economy is already weak, and has been for decades. Its gross domestic product has barely grown over the past 20 years. Its unemployment rate, at 9.8 percent, is one of the highest in Europe. Worse still, Italy is one of the most heavily indebted nations in the world. Government debt stood at 138 percent of GDP before this crisis hit… Italy’s economic crisis will ultimately put serious pressure on the euro. …If Italy’s economic hit weakens its banks sufficiently, the European Central Bank could be forced to step in with a large bailout. …Italians would likely face years of depression and stagnation… Italy’s economic lockdown is sending clear warning signs that a fiscal meltdown is coming.

Henry also speculates in the column that Italy’s current left-populist government will be replaced by a right-populist government. Furthermore, he thinks this could lead to the country abandoning the euro (the currency shared by many European nations) and going back to a national currency.

For what it’s worth, that would be a mistake.

A major problem in Italy is that populist politicians want people to believe the fairy tale that it’s possible to consume more than you produce.

That currently happens in Italy when politicians borrow money and spend it.

If the country gets rid of the euro and goes back to the lira, politicians will also be able to print money and spend it.

In other words, Italy’s populist politicians would have another way of undermining prosperity.

(I’m not a big fan of the European Central Bank’s easy-money policies, but it’s always possible to go from bad to worse.)

Meanwhile, Joseph Sternberg of the Wall Street Journal opines about lessons that can be learned from Europe about government-run healthcare.

Scientists around the world have worked overtime to get a handle on Covid-19, yet one great unknown remains. We still don’t know for sure whether this is only a medical crisis, or also a medical system crisis. …Doctors in Italy know what to do to treat severe cases, such as using ventilators in intensive-care units. But hospitals lack the beds and equipment for the influx of patients and Italy doesn’t have enough doctors even to make the attempt. Ill patients languish in hospital corridors for want of beds, recovering patients are rushed out the door as quickly as possible, and exhausted (and sometimes sick) doctors and nurses can’t even muster the energy to throw up their hands in despair. …U.K. policy makers understand what such analyses portend—because underinvestment in Britain’s creaking health-care system is even worse. …As a result, British authorities…are desperate to hold off on a mass outbreak until the socialized National Health Service has recovered from its chronic winter crisis. …the NHS…already falls to pieces every year with the normal ebb and flow of cold-weather ailments. Each winter crisis becomes a bit more acute, and this year was no exception. As of December, only 80% of emergency-room patients were treated within four hours of arrival, down from 84% in the depths of the previous two winters.

Interestingly, not all European nations are created equal.

…the U.K. and Italy are significantly more dependent on direct government financing of health-care than is France or Germany. Government accounted for 79% of total health-care spending in the U.K. in 2017, according to Eurostat, and 74% in Italy. Germany and France both rely on compulsory insurance schemes with varying degrees of subsidy and government meddling, but outright government expenditure amounts to only 6% of total health spending in Germany and 5% in France. …politicians already have made decisions that may seal a country’s coronavirus fate…the important choices may have already come in the guise of technocratic health spending and investment decisions made largely out of public view over many years. How lucky do Europeans feel?

The moral of the story is that coronavirus vulnerability may be worse in nations where government has the most control over healthcare.

Since the disease is a “black swan” (i.e., an unexpected big event), we should be cautious about drawing too many policy conclusions. After all, any nation with a severe coronavirus outbreak is going to face major problems.

That being said, it may be worth noting that Germany and France have an approach that’s more akin to Obamacare while the system in Italy and the United Kingdom is more akin to Medicare for All.

Either policy is greatly inferior to the free market, but it does raise the question of whether it’s a good idea to jump from a frying pan into a fire.

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Image credit: Sébastien Bertrand | CC BY 2.0.

Coronavirus Lessons from Europe

Dan Mitchell

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