The economic slump caused by the coronavirus COVID-19 is expected to be deeper than the 2009 Great Recession, according to a European Commission document seen by EURACTIV.
The pandemic and the measures taken to contain the virus have brought the economy to a halt in most EU member states. Factories have temporarily closed and demand in sectors like retail and tourism has collapsed as governments ordered people to stay at home in order to contain the spread of the virus.
The Commission hasn’t estimated yet how much the European economy will contract as a result, as the spread of the virus hasn’t reached its peak yet.
But an internal document dated 30 March already foresees that the fallout of the coronavirus could be more damaging than the financial crisis a decade ago.
“Taking into account the extent of the supply side disruptions in the productive capacity of countries and in global value chains (including intra-EU and extra-EU), we can reasonably expect this crisis to be deeper than the Great Recession in 2009,” the document said.
The EU’s GDP fell by 4.3% in 2009.
The total impact will depend on the duration of the measures adopted to contain the spread of the disease, the Commission said.
In the internal report, the EU executive noted that the main economic impact has moved from the indirect effects of disruption in international supply chains, when the crisis was focused in China, to the suspension of non-essential economic activities in countries across the world, especially in Europe
These effects on the demand side, both in the EU and external markets, are gradually kicking in, with transport, tourism, hospitality and catering services among the first affected.
As the situation is not expected to improve in the near future, a quick recovery (a ‘V’ shape) is no longer contemplated.
“Recent developments indicate that it is becoming a severe global demand crisis. Now that production facilities in China are approaching a ‘back to normal’ situation, international indicators of economic activities are not reverting to their previous levels,” the text reads.
In addition, the Commission warns that the spread of the virus in the US, the country with the largest number of cases, is “likely to prolong the impact of the crisis in time possibly until the summer.”
And there could be ripple effects yet to come. “The impact that a second wave of effects that could be triggered by uncertainties and financial losses cannot be estimated at this stage,” the document says.
As the crisis continues, the damage is expected to be passed on from the real economy to the financial sector.
Against this backdrop, national governments would have to adopt additional measures in the near future. Among them, the Commission said nationalising companies in vital sectors of the economy “might be necessary”, at least temporality, while additional capital could be injected into other companies and sectors.
The EU executive however warns of providing liquidity to bail out failing companies overloaded with ‘bad loans’.
To date, European countries adopted a fiscal stimulus package totalling on average 2% of their national GDP (around €240 billion for eurozone countries) and provided liquidity of around 13%. But the European Central Bank has warned that the stimulus may need to double in size, to reach around 4% of GDP.
From the outset of the pandemic, member states adopted measures aimed at reinforcing their public services, in particular health services. They also offered direct and indirect income support for workers and provided liquidity to help firms, mostly in the form of tax deferments.
And aid was also approved at EU and national level to help ailing sectors, in particular small businesses.
Member states are now working on a bigger European recovery package, that could include the European Stability Mechanism, the EU’s bailout fund.
The Eurogroup will meet on 7 April, and will report back to EU leaders later that week.
(Edited by Frédéric Simon)
