Post-COVID19 resilience: lessons from the China Trade Shock for Europeʼs economies

Abstract

When we talk about the economic consequences of COVID-19, the question arises about the strength and duration of the changes triggered by the pandemic. Currently, all indications are that COVID-19 is likely to change the structure of the world economy permanently. Evidence suggests that the pandemic is a permanent reallocation shock – one that cannot be mitigated with standard fiscal and monetary stimulus. What are the structural reforms and mechanisms that would allow economies to adapt and to effectively reallocate resources in response to such shocks? Which features made economies resilient to major reallocation shocks in the past? To answer these questions, we take a closer look at the China Trade Shock and its impact on the US economy. We then draw lessons for Europe today.