Friday

3rd Feb 2023

EU forecasts deeper recession, amid recovery funds row

  • Economics commissioner Paolo Gentiloni said returning to EU budget deficit and debt rules should wait (Photo: European Commission)

The EU Commission on Tuesday (7 July) drew a grimmer picture of the European economy damaged by the coronavirus pandemic than before, as the reopening of the continent's economy has been slower than expected.

The eurozone economy will drop deeper into recession this year, and rebound less quickly next year, than the commission originally estimated in May.

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France, Italy and Spain will contract more than 10 percent this year, the commission said in its summer economic forecast on Tuesday.

The 19-member eurozone will contract by a record 8.7 percent this year, before growing by 6.1 percent in 2021. In May, the commission had forecast a 2020 downturn of 7.7 percent and a 2021 rebound of 6.3 percent.

The commission said the lifting of Covid-19 lockdown measures in euro area countries was less swift than initially predicted.

In Germany, the commission moderated its estimates for the 2020 downturn to -6.3 percent from -6.5 percent. The Netherlands can also expect a less extreme contraction.

Poland will see the smallest slump, with a 4.6 percent contraction this year - while it remains one of the biggest recipients of EU aid under the recovery plans.

Economics commissioner Paolo Gentiloni told reporters that the bloc's budget deficit and debt rules should remain suspended even after growth returns next year. Eurozone finance ministers will discuss that controversial issue later this week.

The commission's new estimates assume there will be no second wave of infections triggering new restrictions - which is the highest risk for a more permanent economic downturn.

The stability of financial markets and insufficient coordination between national policy responses also carries risks, the report said.

"The road to recovery is still paved with uncertainty," Gentiloni said, adding that "the expected differences among member states have also become larger."

The Italian centre-left commissioner urged EU leaders to agree on the long-term EU budget and recovery package next week, when they meet in Brussels, "to inject both new confidence and new financing into our economies at this critical time".

'No' to troika this time?

The commission's sombre warning comes as capitals await the compromise proposal on the budget and recovery plan from European Council president Charles Michel, expected on Thursday.

It will be the basis of discussion among governments, whom are divided on several issues ranging from the overall size of the package to the conditions of the distribution.

One recently-emerging faultline is the conditions attached to unlocking the planned €750bn fund.

Greek prime minister Kyriakos Mitsotakis told the Financial Times in an interview that Greece will not accept strict EU conditions.

Greece, and other countries helped out during the debt crisis, had been subjected to tough conditions to access the funds, overseen by the "troika" of the commission, the International Monetary Fund (IMF) and the European Central Bank (ECB).

Other countries, particularly the so-called 'Frugal Four' are seeking strict conditions to access funds.

EU budget commissioner Johannes Hahn said on Tuesday at an event organised by the Brussels-based Bruegel think tank that he does not see a contradiction between the two positions.

"I think we can reconcile the different ideas in a concept, an architecture that meets the different expectations," he said.

The Austrian commissioner referred to the European semester, an annual exercise under which the commission makes economic recommendations to countries which are then discussed by the 27 member states.

Under the commission's proposal, a reform plan would be submitted to the commission by the country seeking help from the recovery fund - which would be discussed and approved by all member states.

Hahn said there could be advanced payments under the recovery fund, but disbursement of further money needs to be linked to the fulfilment of specific "milestones" reached under the programs.

"It will be a bottom-up not top-down process," Hahn said. He also urged EU leaders to agree at the summit next week.

"There is a spiral, either upwards or downwards. If there is no confidence, people will not consume, and there is no investment, if investment doesn't pick up, we might face serious problems," he said, adding: "We need a strong signal form EU leaders that they can take a decision."

EU leaders to reconvene in July on budget and recovery

Most EU leaders want an agreement before the summer break, but the Dutch PM, leading the 'Frugal Four', warned there might not even be a deal then. But the ECB's Christian Lagarde has warned of a "dramatic" economic fall.

EU links access to recovery fund to economic advice

Most EU countries are now breach the common fiscal rules, as governments tackle the economic fallout of the coronavirus pandemic. The commission plans to link recovery funds to countries following its budgetary advice - but sanctions seem to be few.

EU set for record recession, putting euro at risk

Debt levels around Europe, especially in southern states, forecast to rise alarmingly, but EU commission remained confident countries can manage, despite fears of a second viral wave.

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The European Central Bank raised interest rates by another 0.5 percent to a 14-year high, and expects to hike rates by another half percent in March. But what does that mean for the green transition?

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