MNI INTERVIEW: Eurozone Should Rebound-Kiel Institute Head

--Eurozone Should Return To Pre-Pandemic Growth, Kiel Institute's Felbermayr

Tells MNI

--Virus To Accelerate Restructuring

By Luke Heighton

     FRANKFURT(MNI) - Strong eurozone fundamentals should mean the eurozone

returns swiftly to pre-Covid growth levels, although the pandemic should

accelerate structural change and recent positive economic data should be treated

with caution given the potential for a second wave of the virus, the head of top

German think tank the Kiel Institute for the World Economy told MNI.

     Pickups in consumer spending, coupled with modest gains in industrial

production following the easing of lockdown conditions, were "encouraging"

Gabriel Felbermayr said in an interview, in which he also said Brexit's negative

effects on the eurozone economy may have been overstated.

     Once the pandemic fades, it should be possible to return to normal

"relatively quickly [...] there is nothing fundamentally wrong," he said,

although he added that a recent upsurge of the virus in the U.S."tells us to be

very cautious." Economies will be changed permanently once the pandemic recedes,

he noted.

     "Those who say that after the crisis everything will be different, that

we'll never grow as before - I believe, are completely wrong," said Felbermayr,

also a former head of the ifo Center for International Economics. "I'm also

relatively optimistic regarding people's ability to cope with the virus as it

becomes part of our daily routines, our daily environment. We don't have a cure

for AIDS, but we've learned to live with it."

     --RISK OF SECOND WAVE

     The main risk to this cautiously positive scenario, he continued, is that

infection rates remain persistently high, leading to a slower recovery and an

accumulation of problem assets on banks' balance sheets. Were that to happen,

Felbermayr said, "we have a fundamental problem, and we risk getting into a

downward spiral dynamic."

     In Germany, joblessness is likely to rise after years of record employment

as the virus accelerates industrial change, although mass unemployment is

unlikely, he said.

     "In a sense we are very lucky," Felbermayr said, "because the time of

restructuring coincides with demographic aging. Labour demand is lower than it

might otherwise be, but we are also in a situation of shrinking labour supply,

at least until migration grows massively."

     Another risk is Brexit. But Felbermayr said the scope for it to damage the

eurozone economy may have been exaggerated.

     European investment in Britain has been on a downward path since the 2016

vote to leave the EU, he noted, adding that "we have already had a lot of

anticipation effects. In a sense many of the bad things that Brexit would bring

have already occurred."

     The size of the Covid recession may also have the effect of putting Brexit

into perspective, he said: "Sometimes I have the impression that on the UK side,

but maybe also in Brussels, negotiators are a little bit more relaxed about a

hard Brexit because of the corona crisis."

     Value chains across Europe were already shrinking back from their 2010-11

levels before the crisis, Felbermayr said, with the pandemic triggering an

additional reshoring process. Britain and Europe will become "more disconnected,

he continued, and their economies will benefit less from economies of scale.

     The rhetoric of taking back control has also spread to continental Europe,

he said.

     "The biggest political concern, Felbermayr said, "is the general lack of

trust. It's not just Boris Johnson and Michel Barnier; there is a lack of trust

everywhere. How much honest cooperation is there between London and Washington

these days? Mutual confidence is not rebuilt easily. Every country in Europe

will be damaged by that erosion of trust."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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