The Year After: How Mediterranean Economies Coped with the COVID–19 Pandemic

The chapter analyses the macroeconomic impact of the pandemic by describing the dynamics of the primary macroeconomic aggregates in Med countries. The data show that COVID-19 has hit the area heavily, not only in terms of loss of life but also ignited an unprecedented economic crisis. In 2020, in most countries of the region, GDP fell by more than 7 percent, and in some instances, such as Italy, the one-year drop (almost 9 percent) wiped out the cumulative growth of the previous 20 years. Yet not all countries in the Med region faced a severe recession: while the economic contraction in Serbia, Israel, Jordan, and Albania was relatively mild, Egypt and Turkey even registered an increase in real GDP. 2021 was a year of recovery, but the economic future is still uncertain and closely dependent on the development of the pandemic. The extent of the GDP rebound depends on the combination of government intervention, vaccination programs, and the specific nature of fundamentals in national economies. The economic crisis has been asymmetric within economies and across countries. Sectors involving face-to-face interaction, like tourism, sport, music, and art, suffered the most. In some instances, their activity came to a complete halt; other sectors, like food, have done relatively well. Yet governments have played a central role in buffering the pandemic's negative impact. This is particularly true in the Euro Med countries, which have registered many government interventions supporting domestic demand. These interventions have enormously contributed to the pandemic producing different effects across countries and sectors. Such policies have resulted in a significant increase in public finance deficit and public debt. The economic crisis was mainly caused and inflated by the sharp decline around the globe in international trade, which often almost came to a halt. The decrease in international trade was particularly severe in the Mediterranean area, and exports fell almost everywhere, with some countries suffering more than others. Between 2019 and 2020, Albania, Croatia, and Greece saw exports drop by more than 25 percent. Capasso and Filoso state that the pandemic has hit consumers' behavior and preferences. Economic uncertainty, the fall in income, and deteriorating health conditions have influenced the propensity to consume and to save, with sizable effects on people's behavior which might be long-lasting. The growth in public sector expenditure over 2019-2020 and the corresponding decline in fiscal revenues have produced large deficits in all Mediterranean countries. Public sector deficit growth over 2019-2020 and the fall in revenues have translated into surging public debt, destabilizing those heavily indebted governments (Italy reached a ratio of 144 percent ratio, Portugal 123 percent, France 106 percent, while Algeria jumped to 60.5 percent with a 30.3 percent increase). During 2020, the world's public debt reached a historic peak of 97 percent of GDP, while debt grew further to 99 percent in 2021. These impressive numbers pose unprecedented financial risks of instability worldwide. Facing these challenges requires credible macroeconomic policies to guarantee solvency. The pandemic and the ensuing crisis and recovery have also put under pressure the commodities market, with possible long-run consequences on inflation. The lockdowns and the consequent halt to the transportation sector significantly reduced the world's demand for fuel. By contrast, the abrupt recovery has produced a large gap between demand and supply in the energy sector, pushing up energy prices, production costs, and the prices of most products through the supply chain. Curbing inflation without disrupting the recovery will be the greatest challenge for Central Banks.