The economies of EU countries will shrink by 7.4% this year as the coronavirus crisis is set to cause the worst recession in the bloc’s history, according to the European Commission’s spring forecast presented on Wednesday (6 May), which also foresaw a significant rebound in 2021.
Eurozone’s output is also expected to register a record fall of 7.7%.
During the previous financial crisis, the EU contracted by 4.3% and the eurozone by 4.4% in 2009, the worst year of the crisis.
An internal Commission document first reported by EURACTIV.com on 31 March already warned of the severe recession looming.
“Both the depth of the recession and the strength of the recovery will be uneven, conditioned by the speed at which lockdowns can be lifted, the importance of services like tourism in each economy and by each country’s financial resources,” the Commissioner for Economy, Paolo Gentiloni, said on Wednesday.
Once countries start to overcome the health crisis and the confinement measures are lifted, the Commission expects a gradual improvement of the European output by the end of the year. In 2021, the rebound will be significant both for the EU (6.1%) and the eurozone (6.3%)
Despite the solid growth expected next year, the eurozone would not recover all the ground lost in 2021, the Commissioner said.
In the case of Spain, Italy and the Netherlands, output will be at least 2% below the level registered at the end of 2019, before the coronavirus hit.
But the recovery could be more marked in 2021 if member states agree on an ambitious stimulus, said Gentiloni.
The Netherlands is precisely one of the countries more reluctant to share the costs of the recovery, by opposing the issuance of common debt (or ‘coronabonds’) and by favouring loans (instead of grants) to support the most affected economies.
Gentiloni warned that preparing the forecast was challenging and that many risks remain that could worsen the economic outlook, like a longer-lasting or more severe pandemic, the fragmentation of the single market, financial turbulences and a new wave of protectionism.
The spring forecast reflected the devastating impact of the virus, which has depressed corporate investments and EU exports, raised deficit and debt levels and led to higher unemployment.
Gentiloni explained that the increase of unemployment has been contained thanks to the temporary work schemes activated by various member states. For that reason, the deterioration of the labour market has been less severe than the economic decline, or the impact in other countries, like the US.
Unemployment in the EU will increase from 6.7% last year to 9% this year, and will slowly decline to 7.9% in 2021.
The EU has put forward various instruments to tackle the economic fallout of the pandemic, including a €540 billion liquidity scheme channelled via various institutions.
The bulk of the money, around €240 billion, is offered to eurozone members by the European Stability Mechanism.
Gentiloni fell short of recommending an ESM soft loan to Italy and Spain, the countries more severely affected by the pandemic.
But he said that the eurozone’s bailout fund represents an “opportunity” for those countries that could face higher interest rates to finance their debt in the markets, given the better conditions offered by the ESM.
In its forecast, the Commission again highlighted the possible risk of an uneven recovery, given that some member states have weaker public finances to support their companies and households.
The EU executive warned that this could lead to “severe distortions within the single market” and worsened economic, financial and social divergences among eurozone members that “could ultimately threaten the stability of the Economic and Monetary Union”.
In order to address that risk, Gentiloni said, the Commission is discussing the possibility of a pan-European tool to support companies by injecting some capital (equity). It would be “a good tool to rebalance the risks of imbalances” in the internal market, he said.
[Edited by Zoran Radosavljevic]