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Economic Sentiment and the Covid-19 Crisis: Evidence from European Countries

ABSTRACT This paper examines empirically the impact of Covid-19 pandemic on economic sentiment in Europe. We focus on the EU-27 countries plus the UK during the period September 2019 to November 2020, before the initiation of Covid-19 vaccination, using data from Eurostat’s Business and Consumers Surveys. Panel data estimates indicate that the pandemic has generated strongly declining sentiments among economic agents in Europe through the slowdown of the economy due to the imposed restrictions on movement and other controls. The risk of infection-induced mortality has played a separate role in generating pessimism directly from human psychology. The emergency social protection measures launched by governments have, on average, been effective in reducing market pessimism. However, we provide evidence suggesting that policymakers should focus more on targeted support to poor households and other disadvantaged groups of the population. Overall, our results suggest that certain structural features of economies, including poverty exposure, a large informal sector, and a high percentage of vulnerable employment as well as limited financial and informational openness, are factors that may intensify the severity of the adverse economic consequences of a pandemic.