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25th Jan 2021

Coronavirus

EU set for record recession, putting euro at risk

  • Economy commissioner Paolo Gentiloni said he was confident EU leaders would approve a recovery initiative in June (Photo: European Commission)

The EU is heading for a historic economic recession on the back of the coronavirus pandemic, and a patchy rebound could put the single currency at risk.

The eurozone is projected to contract by 7.75 percent and the EU to be hit by 7.5 percent this year, according to a forecast published by the commission on Wednesday.

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  • Commissioner Paolo Gentiloni and commission spokesman Eric Mamer present the forecast to an empty press room due to the coronavirus measures (Photo: European Commission)

"It is now quite clear that the EU has entered the deepest economic recession in its history," economic commissioner Paolo Gentiloni said Wednesday (6 May).

The current downturn is thus estimated to be significantly worse than the 2009 crisis, when the EU economy contracted by 4.5 percent.

The EU executive warned that an uneven recovery among member states could also threaten the stability of the euro.

"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," Gentiloni said.

"Such divergence poses a threat to the single market and the eurozone, he added.

The EU executive said that coordination of national measures and common EU level action is needed to avoid "severe distortions" in the bloc.

Debt balloons

The looming economic crisis once again puts southern countries with already large public debts in the spotlight - as in the euro crisis a decade ago.

This time government efforts to pump money into the economy will boost deficits in the eurozone as a whole to an overall 8.5 percent of GDP this year from 0.6 percent last year, before it goes back to 3.5 percent in 2021, according to the forecast.

As a result, public debt will balloon with the eurozone debt increasing to 102.7 percent of GDP this year from 86 percent last year, and back to 98.8 percent in 2021.

The worst hit will be Greece, Italy, and Spain, which will see their economy economies shrink by more than nine percent. France, the eurozone's second largest economy, will contract by over eight percent.

Their already large debt ratio will increase, widening the gap with Nordic countries.

Italy, the euro area's third-largest economy, will see its debt increase to 158.9 percent of GDP this year from 134.8 percent in 2019. The commission said it will then decrease to 153.6 percent in 2021.

Italy's debt ratio remains second only to that of Greece, which is predicted to surge to nearly 200 percent of GDP this year. Gentiloni said the commission believes that Greece's debt is sustainable.

EU leaders have been at loggerheads over the past weeks on how to help economies that have been especially hit by the coronavirus, and are then forced to deal with major economic fallout.

Italy, Spain and France have been lobbying for more burden-sharing, while other countries, with Germany and the Netherlands in the lead, have been reluctant to be pulled into debt-financing for other countries.

The commission will later this month unveil its long-term budget proposal, along with a recovery initiative that will attempt to calm both camps, and help EU economies turn around.

Gentiloni said he was confident EU leaders would approve it in June.

"All reasonable governments and public servants have cleared the fact we are risking some fundamental things like the level playing field in our single market, convergence in euro area and others. If we lose these things the consequences will not be only for the frugal Nordics or the southern or the eastern countries. The consequences will be very very and for all Europeans," he added.

Further risks

In 2021, the commission expects a rebound, but it will not be enough to make up fully for the losses of this year. The eurozone is to return to growth of 6.3 percent in 2021, and the EU as a whole is to go back to 6.1 percent.

European economic output has dropped by a third almost overnight as the pandemic hit the bloc due to the pandemic.

The inflation rate will slow to 0.2 percent, and investment will decrease by 13.3 percent this year. Unemployment is expected grow to an average nine percent in the EU.

The commission's forecast is based on an optimistic scenario, supposing that gradual de-confinement starts in May throughout Europe.

Estimates could be worsened if there is a severe and longer pandemic than foreseen and more lockdown measures, or a second wave in the autumn and winter.

The pandemic could also trigger more protectionism in world trade, which would further hurt Europe's interconnected economy. The commission added that a financial market turmoil is also still possible.

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