The recession in 2020 due to the Covid-19 pandemic is the worst that the European Union has ever experienced, the European Commission said on Wednesday 6 May when it presented its spring economic forecasts, which take into account the economic situation observed and the emergency measures announced up to 23 April.
“First, it is now quite clear that the EU has entered the deepest economic recession in its history. The EU economy is expected to contract by a record 7.4% this year, 7.7% in the euro area”, said Economics Commissioner Paolo Gentiloni, while the recession linked to the financial crisis had reached “around 4.5%”.
The extent and duration of this recession will depend on the rate at which the imposed lockdown is lifted almost everywhere in Europe. However, the Commission expects a gradual resumption of the currently paralysed economic activities, especially in the second half of 2020. This will translate into a rebound next year.
“In 2021, we expect a rebound of 6.1% in the EU and 6.3% in the euro area”, confirmed Mr Gentiloni. But he warned that it will not be enough “to fully make up for this year’s loss”.
Despite the symmetrical nature of the external shock of the pandemic, these aggregate data mask important differences across Member States. They are not heading into the recession under the same macroeconomic conditions, nor will they emerge from it in the same way and on the same timeline.
Member States most affected by the recession are expected to be Greece (-9.7% of GDP), Italy (-9.5%), Spain (-9.4%) and Croatia (-9.1%), while Poland (-4.3%), Luxembourg (-5.4%), Austria (-5.5%) and Malta (-5.8%) are expected to suffer less from the abrupt halt in economic activity.
Unemployment is expected to rise this year to 19.9% of the labour force in Greece, 18.9% in Spain, 10.2% in Croatia and 10.1% in France, while it should not exceed 4% in Germany and 5% in the Czech Republic.
However, for Mr Gentiloni, the unemployment data do not reflect the full social reality of the crisis, since in countries where short-time working mechanisms exist, there will be no unemployment, but a reduction in hours worked and, therefore, a sharp drop in workers’ incomes.
In a context where the Stability Pact has been frozen in 2020, each country is entitled to take the budgetary measures it deems necessary to support businesses and households. As a result, government deficit and debt will inevitably rise to 8.5% and 103% of GDP respectively in the euro area and 8.3% and 95.1% of GDP in the EU27.
In 2020, deficits are expected to be highest in Italy (-11.1% of GDP), Spain (-10.1%), France (-9.9%) and Poland (-9.5%), while they are only -2.8% in Bulgaria and -4.8% in Luxembourg. Government debt will exceed 100% of GDP in seven Member States: Greece (196.4%), Italy (158.9%), Portugal (131.6%), France (116.5%), Cyprus (115.7%), Spain (115.6%) and Belgium (113.8%). By comparison, German public debt is expected to rise from 59.8% to 75.6% of GDP.
Rebound expected in 2021
All EU countries will experience an economic rebound, but the scale of the rebound will vary. It is expected to be highest in Greece (7.9%), Croatia (7.5%), France and Lithuania (both 7.4%) and lowest in Finland (+3.7%), Poland (+4.1%), Romania (+4.2%), Sweden (+4.3%) and the Netherlands (+5.0%).
According to the Commissioner, the way Member States will emerge from the crisis will depend on the severity of the pandemic, the exposure of their economies to the most affected sectors – such as tourism – and, above all, the extent of the budgetary measures taken. Germany, as the largest EU economy, seems to be best placed, as deconfinement is underway, and its fiscal room for manoeuvre gives it ample means to support its economy.
“By the end of 2021, only Germany, Austria, Croatia, Slovakia and Poland are forecast to recoup the level of economic activity seen in the last quarter of 2019. By contrast, the level of output in Italy, Spain and the Netherlands is forecast to remain more than 2% below the end-2019 level”, Mr Gentiloni noted.
Hence the importance, according to the Commissioner, of a broad European recovery plan that promotes a level playing field in the internal market. He referred in particular to work on a pan-European tool for direct investment in companies (‘pan-European tool for equities’) to enable a rebalancing of national measures taken.
Commission Vice-President Valdis Dombrovskis said that “we must now avoid a scenario where we end up with major disparities within the Single Market, with divergences becoming entrenched” by reaching a quick agreement on the ambitious European Recovery Plan.
The positive economic impact of the revised draft multiannual financial framework (MFF) for 2021-2027 coupled with the recovery plan, which the Commission will propose in the second half of May (see EUROPE 12480/3), has not been taken into account in the European institution’s forecasts and must therefore be considered as “an upside risk” that will boost economic recovery, an European official also said.
The Commission will present its spring economic forecasts to euro-area Finance Ministers who will meet on Friday 8 May by videoconference (see EUROPE 12481/3). It is expected to present its country-by-country socio-economic policy recommendations on Wednesday 20 May.
See the economic forecasts: https://bit.ly/35AHG84 (Original version in French by Mathieu Bion)