Brussels (Brussels Morning) Hopes that the coronavirus-stricken EU economy might experience a slight upturn by the end of the year were dashed when Economy Commissioner Paolo Gentiloni announced the EU forecast today indicating that following “the deepest recession in EU history in the first half of this year and a very strong upswing in the summer” Europe’s rebound had been “interrupted” because of the resurgence of the pandemic.
The European Commission’s forecast projects that the Eurozone economy will contract by 7.8% in 2020 before growing 4.2% in 2021 and 3% in 2022. As for the EU economy, the forecast envisages that it will contract by 7.4% in 2020 before recovering with growth of 4.1% in 2021 and 3% in 2022.
This reading implies that the output in the European economy would barely return to pre-pandemic levels in 2022. While growth is expected to resume, recovery will remain incomplete and economic performances will vary across EU countries.
“In the current context of very high uncertainty, national economic and fiscal policies must remain supportive, while NextGenerationEU (NGEU) must be finalised this year and effectively rolled out in the first half of 2021,” the Economy Commissioner added.
Corona virus dragging the economy
Despite phasing out restrictions to social life and economic activity in May, leading the way for a strong pick-up in activity, the surge of recent lockdowns announced across the EU, hoping to curb the spread of the virus, is set to knock down the EU economy. Investment activity and consumer spending have been suppressed amid a significant labour market downturn.
“After what appears to have been an exceptionally strong rebound in the third quarter, EU gross domestic product (GDP) growth looks set to stall in the fourth quarter of 2020,” the EU economic forecast report reveals.
“With lockdown measures being tightened, it is becoming increasingly hard to see how the Eurozone economy will avoid falling back into decline. For all countries, the outlook has grown increasingly dark,” Chris Williamson, chief business economist at IHS Markit told Reuters.
Deficits and public debt
The increase in government deficits this year is expected to be quite significant across the EU. Social spending rose and tax revenues fell, both as a result of the exceptional policy actions put in place to support the economy and the impact of automatic stabilisers.
The EU forecast projects the aggregate government deficit of the Eurozone to increase from 0.6% of GDP in 2019 to around 8.8% in 2020, before decreasing to 6.4% in 2021 and 4.7% in 2022. This estimate reflects the expected phasing out of emergency support measures in the course of 2021 as the economic situation improves.
As for the aggregate euro area’s forecast of debt-to-GDP ratio, it is set to increase from 85.9% of GDP in 2019 to 101.7% in 2020, 102.3% in 2021 and 102.6% in 2022.
Unemployment to rise
Policy measures at EU and national level have helped protect jobs and incomes through compensation schemes designed to tackle the crisis. Yet, unemployment is set to rise through 2021, before finally stabilising in 2022.
The EU forecast projects the unemployment rate in the Eurozone to rise from 7.5% in 2019 to 8.3% in 2020 and 9.4% in 2021, before declining to 8.9% in 2022. The unemployment rate in the EU is forecast to rise from 6.7% in 2019 to 7.7% in 2020 and 8.6% in 2021, before declining to 8.0% in 2022.
The combined effects of fiscal and monetary policy have helped the rebound so far, according to the EU forecast. The European Central Bank (ECB) has kept its policies “very accommodative in order to maintain easy financing conditions”.
Last week, the ECB predicted the Eurozone economy would shrink 8.7% this year, before rebounding 5.2% in 2021 and 3.3% in 2022 — a slightly more pessimistic outlook in comparison with today’s EU’s forecast.
The ECB said it’s ready to re-activate its stimulus to pump more money into the financial market, adding to the unprecedented 750 billion euro funneled through the Pandemic Emergency Purchase Programme (PEPP), in March.
“They want to present certainty and they want to avoid speculation in European markets,” Carsten Brzeski of ING Research told CGTN. “It signals to the outside world that all policy makers stand together, that they’re really putting everything on the table to kickstart the economic recovery of the Eurozone and Europe.”
Advocating for a more sustainable economy, not relying on permanent debt, Positive Money Europe (PME) argued that rather than “pumping more money into financial markets, as the ECB is doing with quantitative easing, the bank should deploy helicopter money.”
By “helicopter money”, PME is referring to a policy under which the central bank creates money and sends it directly to members of the public, in the form of unilateral transfers, which do not have to be paid back.
According to the Commission’s report, the NextGenerationEU ,the EU’s economic recovery programme, including the Recovery and Resilience Facility, has the potential to lift Europe’s economies on a significantly better recovery path in terms of GDP, labour market effects, and even public debt ratios. Yet, uncertainty remains high due to pandemic developments as well as the outcome of the Brexit’s deal or no-deal with the Union.