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The volcano’s cost to Europe

What’s at stake: As Europe’s skies start to reopen, the job of counting the cost to its economy can begin. In the six days that followed a huge eruption at Iceland’s Eyjafjallajökull volcano, Europe turned into a no-fly zone. Airlines globally lost an estimated €1.3bn in revenue. Some 7m passengers were stranded, delayed or otherwise […]

By: Date: April 21, 2010 Topic: European Macroeconomics & Governance

What’s at stake: As Europe’s skies start to reopen, the job of counting the cost to its economy can begin. In the six days that followed a huge eruption at Iceland’s Eyjafjallajökull volcano, Europe turned into a no-fly zone. Airlines globally lost an estimated €1.3bn in revenue. Some 7m passengers were stranded, delayed or otherwise affected. Over this period, concerns have been growing that the disruption in the European economy due to the eruption of an Icelandic volcano could prove serious. The end to the flight ban also prompted claims that governments throughout Europe had overreacted to the ash cloud and should compensate the industry.

Estimating the costs

Real Time Economics reports that according to an estimate by analysts at Royal Bank of Scotland, less than 1% of the European Union’s work force – around 2 million people – was actually left stranded away from their jobs. And modern communications will have allowed many of those to continue working. However, any disruption, however small, to Europe’s economic recovery is unwelcome, and may help to turn a budding recovery into a double-dip recession, even if the second dip is both brief and shallow. An unusually harsh winter has already stopped the recovery that started in the second half of 2009 from gaining traction, and any further complications can only delay even further a return to healthy-looking growth figures. Europe’s position contrasts pointedly with that of Asia in 2002-03 when it was hit by the fears of a SARS epidemic. The estimated 0.6% of output lost was barely noted in a region that was growing at around of 6% a year at the time. With the EU forecasting growth of a paltry 0.75% this year, a similar-sized hit to the one caused by SARS could change the growth number from a plus to a minus.

Erik Nielsen expects the total effect on the economies to be minimal with only a marginal knock to Q2 GDP.  Air transport is 0.2% of gross valued added (GVA) in the Euro-zone (0.4% in the UK), while land transport is 2.5%, and water transport is 0.3%.  A temporary hit to air freight should be broadly offset by increased use of the other modes of transport.  Likewise for hotels and restaurants (3% of GVA), where a short term disruption should be broadly neutral. Ryan Avent writes that the airlines will feel significant pain from this event, though the impact will differ from that after September 11 in that fear of terrorism continued to reduce traffic volumes after the flight disruptions ended.

Did Europe overreact?

The Economist’s Charlemagne is resisting the urge to side with the political attacks on Europe’s way of handling this crisis. He confesses to being slightly taken aback by the ferocity of the ideological ding-dong now underway in the press and blogosphere, arguing that the whole flight ban is (a) proof of European risk aversion and (b) will be totally unsustainable if it lasts much longer, so must be rethought. Well for one thing the airlines have a vested interest in saying this has been a policy failure, because they would like to be compensated by the EU for their economic losses, which will not happen if this is just an act of God. And for another volcanic eruptions that blow ash all over busy air lanes are very rare events (indeed this volcano last erupted before mass air transport existed), and each eruption is different in terms of the sort of ash they spew out. So easy comparisons are hard, and the pool of available data on successful volcano reactions is small.

A Fistful of Euros writes that in both the volcano and the financial crises, an unexpected event in a forgotten part of the system ends up having global ramifications.  But even as banking systems seemed to be dragging down the world economy in late 2008, governments never gave any serious thought to suspending their operations.  The airspace was shut down not in the basis of a specific airplane event, but a worst-case scenario. It is also interesting to note that, in contrast to the G20-inspired rush to coordinate responses to the financial crisis, the response to the volcano crisis looks very ad hoc.  Yes there are some pan-European agencies and the EU, but the ripple effects are all over the world and once one reviews the tales of woe, one sees that passengers are subject to the varied policies and rules for airlines, airports, hotels, visas, and travel agencies.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


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