Tag Archives: economy

EU economy plunges into deep recession

The EU economy will experience a deep recession this year due to the coronavirus pandemic, despite the swift and comprehensive policy response at both EU and national levels. Because the lifting of lockdown measures is proceeding at a more gradual pace than assumed in our Spring Forecast, the impact on economic activity in 2020 will be more significant than anticipated.

The Summer 2020 Economic projects that the euro area economy will contract by 8.7% in 2020 and grow by 6.1% in 2021.
The EU economy is forecast to contract by 8.3% in 2020 and grow by 5.8% in 2021.

The contraction in 2020 is, therefore, projected to be significantly greater than the 7.7% projected for the euro area and 7.4% for the EU as a whole in the Spring Forecast.

Growth in 2021 will also be slightly less robust than projected in the spring.

Gentiloni: EU faces unprecedented shock

“..Indeed, we are facing a shock without precedent since the Great Depression. Its economic and social consequences pose policy challenges unlike any we have seen in our lifetimes.
The inflation rate is further evidence of this. Data released this morning shows the inflation rate at just 0.3%. In April last year, it was 1.7%.
This is the first time that I present our country-specific recommendations, but it is in fact the tenth set of recommendations that the Commission has presented” Commissioner Paolo Gentiloni said, addressing Brussels press corps on May 20

“The first time was in 2011, when Europe was in in the depths of a very different crisis – in the aftermath of the Great Recession – to the one we face today.
And because, as they say, this time it’s different, so are the recommendations we present today. They are different. They come one week before the recovery plan and these are strictly linked steps.

Our recommendations present, first and foremost, the immediate challenges we are confronted with as a direct result of the pandemic: strengthening our healthcare systems; supporting our workers; and saving our companies.

At the same time, the sustainability and competitiveness challenges we faced before the crisis have not gone away.
Our climate is still suffering, our environment is still hurting. People in cities around the world have experienced clear skies and clean air, in many cases for the first time in their lives – but we know that this is just a pleasant side-effect of a dreadful, yet temporary situation.
If millions of people have been able to carry on working while locked down, including the staff of the Commission, it is a reminder of the huge task Europe faces to be competitive in the digital age.

So as we look to the future, our investment and reform objectives must remain focused on making a success of the green and digital transitions, as well as on social sustainability. I think it is very important that we are speaking today after having adopted the SURE instrument. The Sustainable Development Goals of the United Nations are and must remain our compass.

Let me now make four specific points.
First, in terms of fiscal policy, our message is crystal clear: there needs to be a supportive fiscal stance in all Member States and we recommend that all Member States “take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery”.
When it comes to the question of excessive deficit procedures, our conclusion – which is that “at this juncture a decision on whether to place Member States under EDP should not be taken” – is fully coherent with the decision taken two months ago to activate the general escape clause.

Finally, we underline that public expenditure and investment are important to support the green and digital transition. Once fiscal policy normalises, it will be vital to avoid making the mistakes of the past: in the fiscal consolidation of ten years ago, investment was the first victim. To repeat this approach would be to sacrifice our long-term priorities.

Second, the fight against Aggressive Tax Planning again features in our recommendations and I must say this is an even clearer priority this in the past. All Member States, especially in the recovery situation, must be able to rely on their fair share of tax revenues to implement the fiscal support needed to get through this crisis.

Third, our European Union is also a Union in which the rule of law is of paramount importance. Also on economic grounds. When the rule of law is questioned, it impacts on the business environment and investment climate. Our recommendations this year also clearly highlight this issue.

We have also adopted today the latest enhanced surveillance report for Greece.

The report concludes that, considering the extraordinary circumstances posed by the coronavirus pandemic, the country has taken the necessary actions to deliver on its specific reform commitments.
I expect this report to pave the way for a positive decision by the Eurogroup on the next tranche of debt relief measures worth €748 million.

We also adopted streamlined post-programme reports for Spain and Cyprus.
In conclusion, before passing the floor to Nicolas. I have mentioned the Great Depression and the Great Recession. We must ensure that this crisis will not be remembered as the Great Fragmentation, in which a symmetric shock leads to asymmetric outcomes for countries, sectors, regions, individuals and generations.
This is why we need to help individuals and companies absorb the shock. We need to repair the shortfall in investment and equity. And we need to transform our economies, with a new growth model embracing the green and digital transition.

In a nutshell, we need a well-funded recovery plan. We will present it next week”.

EU Spring 2020 Economic Forecast

The coronavirus pandemic represents a major shock for the global and EU economies, with very severe socio-economic consequences. Despite the swift and comprehensive policy response at both EU and national level, the EU economy will experience a recession of historic proportions this year.

The Spring 2020 Economic Forecast projects that the euro area economy will contract by a record 7¾% in 2020 and grow by 6¼% in 2021. The EU economy is forecast to contract by 7½% in 2020 and grow by around 6% in 2021. Growth projections for the EU and euro area have been revised down by around nine percentage points compared to the Autumn 2019 Economic Forecast.

The shock to the EU economy is symmetric in that the pandemic has hit all Member States, but both the drop in output in 2020 (from -4¼% in Poland to -9¾% in Greece) and the strength of the rebound in 2021 are set to differ markedly. Each Member State’s economic recovery will depend not only on the evolution of the pandemic in that country, but also on the structure of their economies and their capacity to respond with stabilising policies. Given the interdependence of EU economies, the dynamics of the recovery in each Member State will also affect the strength of the recovery of other Member States.

Valdis Dombrovskis, Executive Vice-President for an Economy that works for People, said: “At this stage, we can only tentatively map out the scale and gravity of the coronavirus shock to our economies”.

“While the immediate fallout will be far more severe for the global economy than the financial crisis, the depth of the impact will depend on the evolution of the pandemic, our ability to safely restart economic activity and to rebound thereafter. This is a symmetric shock: all EU countries are affected and all are expected to have a recession this year. The EU and Member States have already agreed on extraordinary measures to mitigate the impact. Our collective recovery will depend on continued strong and coordinated responses at EU and national level. We are stronger together.”

Paolo Gentiloni, European Commissioner for the Economy, said:“Europe is experiencing an economic shock without precedent since the Great Depression. Both the depth of the recession and the strength of 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. Such divergence poses a threat to the single market and the euro area – yet it can be mitigated through decisive, joint European action. We must rise to this challenge.”

A large hit to growth followed by an incomplete recovery

The coronavirus pandemic has severely affected consumer spending, industrial output, investment, trade, capital flows and supply chains. The expected progressive easing of containment measures should set the stage for a recovery. However, the EU economy is not expected to have fully made up for this year’s losses by the end of 2021. Investment will remain subdued and the labour market will not have completely recovered.

The continued effectiveness of EU and national policy measures to respond to the crisis will be crucial to limit the economic damage and facilitate a swift, robust recovery to set the economies on the path of sustainable and inclusive growth.

Unemployment is set to increase, though policy measures should limit the rise

While short-time work schemes, wage subsidies and support for businesses should help to limit job losses, the coronavirus pandemic will have a severe impact on the labour market.

The unemployment rate in the euro area is forecast to rise from 7.5% in 2019 to 9½% in 2020 before declining again to 8½% in 2021. In the EU, the unemployment rate is forecast to rise from 6.7% in 2019 to 9% in 2020 and then fall to around 8% in 2021.

Some Member States will see more significant increases in unemployment than others. Those with a high proportion of workers on short-term contracts and those where a large proportion of the workforce depend on tourism are particularly vulnerable. Young people entering the workforce at this time will also find it harder to secure their first job.

A steep drop in inflation

Consumer prices are expected to fall significantly this year due to the drop in demand and the steep fall in oil prices, which together should more than offset isolated price increases caused by pandemic-related supply disruptions.

Inflation in the euro area, as measured by the Harmonised Index of Consumer Prices (HICP), is now forecast at 0.2% in 2020 and 1.1% in 2021. For the EU, inflation is forecast at 0.6% in 2020 and 1.3% in 2021.

Decisive policy measures will cause public deficits and debt to rise

Member States have reacted decisively with fiscal measures to limit the economic damage caused by the pandemic. ‘Automatic stabilisers’, such as social security benefit payments compounded by fiscal discretionary measures are set to cause spending to rise. As a result, the aggregate government deficit of the euro area and the EU is expected to surge from just 0.6% of GDP in 2019 to around 8½% in 2020, before falling back to around 3½% in 2021.

After having been on a declining trend since 2014, the public debt-to-GDP ratio is also set to rise. In the euro area, it is forecast to increase from 86% in 2019 to 102¾% in 2020 and to decrease to 98¾% in 2021. In the EU, it is forecast to rise from 79.4% in 2019 to around 95% this year before decreasing to 92% next year.

Exceptionally high uncertainty and risks tilted to the downside

The Spring Forecast is clouded by a higher than usual degree of uncertainty. It is based on a set of assumptions about the evolution of the coronavirus pandemic and associated containment measures. The forecast baseline assumes that lockdowns will be gradually lifted from May onwards.

The risks surrounding this forecast are also exceptionally large and concentrated on the downside.

A more severe and longer lasting pandemic than currently envisaged could cause a far larger fall in GDP than assumed in the baseline scenario of this forecast. In the absence of a strong and timely common recovery strategy at EU level, there is a risk that the crisis could lead to severe distortions within the Single Market and to entrenched economic, financial and social divergences between euro area Member States. There is also a risk that the pandemic could trigger more drastic and permanent changes in attitudes towards global value chains and international cooperation, which would weigh on the highly open and interconnected European economy. The pandemic could also leave permanent scars through bankruptcies and long-lasting damage to the labour market.

The threat of tariffs following the end of the transition period between the EU and United Kingdom could also dampen growth, albeit to a lesser extent in the EU than in the UK.

For the UK, a purely technical assumption

Given that the future relations between the EU and the UK are not yet clear, projections for 2021 are based on a purely technical assumption of status quo in terms of their trading relations. This is for forecasting purposes only and reflects no anticipation or prediction with regard to the outcome of the negotiations between the EU and the UK on their future relationship.

This forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 23 April. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 22 April. Unless policies are credibly announced and specified in adequate detail, the projections assume no policy changes.

The European Commission publishes two comprehensive forecasts (spring and autumn) and two interim forecasts (winter and summer) each year. The interim forecasts cover annual and quarterly GDP and inflation for the current and following year for all Member States, as well as EU and euro area aggregates.

The European Commission’s next economic forecast will be the Summer 2020 Interim Economic Forecast which is scheduled to be published in July 2020. This will cover only GDP growth and inflation. The next full forecast will be in November 2020.

#COVID19: Eurogroup rapid response

Today Eurogroup welcomed all the measures taken by Member States and by the European Commission, in particular those taken to ensure that health systems and civil protection systems are adequately provided for to contain and treat the disease, preserve the wellbeing of our citizens and help firms and workers that are particularly affected.

“Facing these exceptional circumstances, we agreed that an immediate, ambitious and co-ordinated policy response is needed. We have decided to act and will respond swiftly and flexibly to developments as they unfold. We will make use of all instruments necessary to limit the socio-economic consequences of the COVID-19 outbreak. We have therefore put together a first set of national and European measures while setting a framework for further actions to respond to developments and to support the economic recovery. Preliminary estimates of the European Commission show that total fiscal support to the economy will be very sizeable. We have, so far, decided fiscal measures of about 1% of GDP, on average, for 2020 to support the economy, in addition to the impact of automatic stabilisers, which should work fully. We have, so far, committed to provide liquidity facilities of at least 10% of GDP, consisting of public guarantee schemes and deferred tax payments. These figures could be much larger going forward” reads the statement of the Eurogroup.

Coordinated efforts at the European level will supplement national measures:
We welcome the Commission’s proposal for a €37 billion “
Corona Response Investment Initiative” directed at health care systems, SMEs, labour markets and other vulnerable parts of our economies, and to make a further €28 billion of structural funds fully eligible for meeting these expenditures. We agreed on the need to implement the necessary legislative changes as quickly as possible” the Eurogroup underlined in the statement.

“We welcome the initiative of the Commission and the EIB Group to mobilise up to €8 billion of working capital lending for 100,000 European firms, backed by the EU budget, by enhancing programmes for guaranteeing bank credits to SMEs. We also support the ongoing efforts of the Commission and the EIB Group to increase this amount up to €20 billion, which would reach a further 150,000 firms. We also welcome the ongoing work to make further funds available as swiftly as possible and to enhance the flexibility of the financial instruments leveraged;
We welcome the initiative of the EIB Group to catalyse €10 billion in additional investments in SMEs and midcaps for their own account and to accelerate the deployment of another €10 billion backed by the EU budget;
We invite the EIB to further enhance and accelerate the impact of the available resources, including through enhanced collaboration with the National Development Banks;
We also welcomed the package of monetary policy measures taken by the ECB last week aimed at supporting liquidity and funding conditions for households, businesses and banks, help the smooth provision of credit to the real economy, and avoid fragmentation of euro area financial markets in order to preserve the smooth transmission of monetary policy”.

Image: Mario Centeno, president of Eurogroup video conference.

Tusk: Brexit means “drifting apart”

Commenting of the future of the economic relations with the UK, the president of the European Council Donald Tusk said:

“During my talks in London last Thursday, and in her speech last Friday, Prime Minister Theresa May confirmed that the UK will leave the Single Market, leave the customs union and leave the jurisdiction of the ECJ (European Court of Justice). Therefore, it should come as no surprise that the only remaining possible model is a free trade agreement. I hope that it will be ambitious and advanced – and we will do our best, as we did with other partners, such as Canada recently – but anyway it will only be a trade agreement”.

“I propose that we aim for a trade agreement covering all sectors and with zero tariffs on goods. Like other free trade agreements, it should address services. And in fisheries, reciprocal access to fishing waters and resources should be maintained.”

“This positive approach doesn’t change the simple fact that because of Brexit we will be drifting apart. In fact, this will be the first FTA in history that loosens economic ties, instead of strengthening them. Our agreement will not make trade between the UK and the EU frictionless or smoother. It will make it more complicated and costly than today, for all of us. This is the essence of Brexit.”

EC: Italian economy at risk

The Italian economy is one of the most at risk in the European Union because of its considerable debt and fragile banking sector, the European Commission said in a recurrent warning that may resonate strongly after Italy’s inconclusive elections.