As economy slows, Commission tells member states to be ready for ‘all scenarios’

(L-R) President of the European Central Bank (ECB) Christine Lagarde, Spain's Minister of Economy and Business Nadia Calvino and Pierre Moscovici, European Commissioner for Economic and Financial Affairs, attend a Eurogroup Finance Ministers' meeting in Brussels, Belgium, 07 November 2019. [EPA-EFE/OLIVIER HOSLET]

EU member states should be prepared for “all scenarios” as the European economy continues to decelerate and is not expected to pick up in the near future, the European Commission warned in its latest economic forecast published on Thursday (7 November).

The European economy has entered a new period. While output grew over the past decade, with solid figures seen in recent years, “this is not the case anymore,” warned Economic Affairs Commissioner Pierre Moscovici.

According to the figures he presented on Thursday, the eurozone will grow by 1.1% this year and by 1.2% in 2020 and 2021. In July, the GDP was expected to increase by 1.2% in 2019 and by 1.4% in 2020.

For the EU as a whole, growth will remain at 1.4% over the next two years, down from the July forecast, which put next year’s growth at 1.6%.

Moscovici told reporters that it is “a new regime” compared with previous forecasts, as his team is no longer expecting that the European economy would rebound over the two-year horizon of its assessment. 

“We must be prepared for all scenarios,” Moscovici said.

Commission’s forecast paves the way for new ECB stimulus

The European Commission kept its growth forecast unchanged at 1.2% on Wednesday (10 July) but revised downwards inflation to 1.3% for this year and the next, strengthening the case for further monetary stimulus as global economic risks worsen.

Macro Buti, director-general of economic and financial affairs at the Commission, wrote in the forecast that the fact that growth is no longer expected to accelerate within the forecast horizon represents “a major shift”, and is based “on the assessment that many features of the global slowdown will be persistent”.

Despite the bleak assessment, Moscovici noted that the European economy will continue to grow, albeit at a slower pace, and the EU executive is not contemplating a recession scenario.

But he added that “we must take care that this ‘plateau’ is not a ceiling, since we have, on the other hand, downside risks which could materialise”.

Draghi urges Germany, Netherlands to invest against risk of recession

The European Central Bank said on Thursday (12 September) it will reactivate its bond-buying programme, stepping up the monetary stimulus to maintain economic growth, but its president Mario Draghi told Germany and the Netherlands the time has come to spend more in order to avoid the risk of a downturn.

He echoed the voices of the ECB and other institutions calling on member states with healthier public finance, especially Germany and the Netherlands, to invest more to stimulate the economy.

Although this stimulus is not “urgent”, Moscovici said, national governments with fiscal space should think about it so we are “capable of reacting rapidly”.

Buti argued that member states in a better fiscal situation should take advantage of the very low or negative financing costs to invest in projects with “high social, environmental and economic return”.

One of the main sources of concern for the EU executive continues to be the ongoing global trade tensions. 

“The surge in trade tensions and record-high uncertainty about trade policies is likely to have inflicted lasting damage to world trade,” wrote Buti, who will lead the cabinet of Commissioner-designate for economy, Paolo Gentiloni.

Countries

In the case of Germany, the Commission mildly adjusted its GDP to 0.4%, but further cut the growth by 0.4% to 1% for next year, the level that should continue in 2021.

The German economy will compensate for weaker global demand and weaker investment with its private consumption and a “moderately expansionary” public expenditure.

Among the largest economies, Spain was forecast to suffer the biggest cut as its GDP growth fell by 0.4% for this year and the next, to 1.9% in 2019 and 1.5% in 2020. In 2021, the Spanish economy is expected to grow by 1.4%

Half of the cut was due to historical data revisions by the national statistics office, but the Spanish economy was also impacted by the weaker growth momentum in the global uncertainty.

The French output is also expected to decelerate to around 1.3% this year and the next, and to 1.2% in 2021. Public consumption will help to offset the slowdown in investment and the impact of the trade tensions on exports.

The Italian economy “still shows no signs of a meaningful recovery”, following the stagnation registered last year, the forecast reads. The economy will grow by a mere 0.1% this year, and by 0.4% and 0.7% in 2020 and 2021, respectively.

According to the Commission assessment, Rome will also fail to balance its public accounts as the coalition government agreed with the Commission. The deficit and debt levels will continue to grow over the two-year horizon due to the weaker growth and the rising costs of past measures.

Italian public debt is expected to increase from 134.8% of its GDP in 2018 to 137,4% in 2021.

Slowing growth: EU countries urged to further adjust spending

The European Commission called on Spain, Italy, France and Belgium to do more efforts to balance their public accounts yesterday (7 May), citing a slowing economy.

[Edited by Zoran Radosavljevic]

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