Wednesday

18th May 2022

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.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

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.

MEPs raise ambition on EU carbon market reform

MEPs on the environment committee agreed on reform of the European carbon market — including expanding it to buildings and transport. They also want to extend the scope of the carbon border tax, and phase out free permits by 2030.

EU countries rush to expand gas import capacity

EU plans to quit Russian gas and replace it, in part, by importing overseas liquified natural gas has lead to a flurry of new gas projects — which threaten to lock in unnecessary gas use for decades.

Lagarde signals summer interest rate hike

European Central Bank president Christine Lagarde signalled an interest rate increase possibly as early as July, but some experts warn for a repeat of the 2011-2012 debt crisis.

News in Brief

  1. Russia soldier pleads guilty to Ukraine war crime
  2. EU to protect Finland and Sweden until they join Nato
  3. Poland backs Hungary over frozen 'rule of law' EU funds
  4. EU to reduce size and scope of Mali military mission
  5. Band members testify about Bataclan attack
  6. German prosecutors want five years for alleged ex-Nazi guard
  7. UN urges Iran to halt execution of Swedish-Iranian academic
  8. EU: legal Russian gas payments possible, but not in roubles

Stakeholders' Highlights

  1. Nordic Council of MinistersNordic delegation visits Nordic Bridges in Canada
  2. Nordic Council of MinistersClear to proceed - green shipping corridors in the Nordic Region
  3. Nordic Council of MinistersNordic ministers agree on international climate commitments
  4. UNESDA - SOFT DRINKS EUROPEEfficient waste collection schemes, closed-loop recycling and access to recycled content are crucial to transition to a circular economy in Europe
  5. UiPathNo digital future for the EU without Intelligent Automation? Online briefing Link

Latest News

  1. Georgia, Moldova, Ukraine - the case for granting EU candidacy
  2. Watchdog calls for tougher curbs on 'problematic' revolving doors
  3. Borrell: EU arms flow to Ukraine amid 'record' Russian losses
  4. UK and EU edge closer to trade war over Northern Ireland
  5. Rescue crew face 20 years jail for saving migrants
  6. Roma refugees from Ukraine face Czech xenophobia
  7. EU not doing enough to help Ukraine, Yellen says
  8. MEPs raise ambition on EU carbon market reform

Join EUobserver

Support quality EU news

Join us