Compared to the spring forecast (see EUROPE 12481/1), the European Commission’s summer forecast projects a sharper recession in 2020 – GDP falling by 8.7% in the euro area and 8.3% in the European Union (compared to -7.7% and -7.4% respectively forecast in May) – as well as a weaker economic rebound in 2021, with a return to economic growth of 6.1% of GDP in the euro area and 5.8% in the EU (6.3% and 6.1% respectively in April).
“The pandemic has hit the European economy harder than previously expected, even if a cautious rebound is now beginning”, said Commissioner for Economy Paolo Gentiloni on Tuesday 7 July. He predicted “the worst drop in GDP since the Second World War” for the second quarter of 2020, around -13.5% compared to the previous quarter for the euro area. In cumulative figures, this fall would be -17% of GDP for the Nineteen in the first half of 2020.
“We continue to navigate in stormy waters and face many risks, including another major wave of infections”, added Commission Vice-President Valdis Dombrovskis.
In 2021, growth will return, but the average level of GDP will remain below the level recorded in 2019. And the economic environment will continue to be dominated by downside risks linked in particular to the situation of the pandemic in the rest of the world, the scenario of a second pandemic wave in Europe and the possibility of a failure of the trade negotiations between the EU and the United Kingdom.
Mr Gentiloni also spoke of the emergence of a “new normality”, where social distancing, whether mandatory or voluntary, will continue for some time and where certain consumption habits will change permanently. This will have an impact on certain economic sectors; tourism, transport and the recreational sector having been the most affected by widespread lockdown.
Widening divergences. The Commissioner for Economy pointed above all to “widening divergences” across Member States, both in terms of economic recession and rebound, although Covid-19 affects them all. This is due to different phases of lockdown, but also to different economic structures.
In 2020, four Member States are expected to face a recession exceeding 10% of national GDP: Italy (-11.2%), Spain (-10.9%), Croatia (-10.8%) and France (-10.6%). The countries least affected by the crisis are expected to be Poland (-4.6%), Sweden (-5.3%), Romania and Malta (both -6.0%), Luxembourg (-6.2%), Germany and Finland (both -6.3%).
Rebound capacities also vary from one country to another. The most affected countries will benefit from the strongest rebounds: +7.6% of GDP for France, +7.5% for Croatia and +7.5% for Slovakia. On the other hand, Finland (+2.8%) and Sweden (+3.1%) are expected to experience a more moderate recovery.
According to Mr Gentiloni, the risk of further increasing socio-economic divergences justifies a rapid adoption and implementation of the European Recovery Plan and the post-2020 EU budget. Intended to help Member States heal the wounds of the pandemic and make their economies more resilient to macroeconomic shocks, the plan is not included in the Commission’s summer economic forecasts.
With regard to inflation, the European institution is of the opinion that the medium-term outlook has not changed substantially since the spring, apart from a rise in oil prices. Price increases in the euro area are expected to reach 0.3% in 2020 and 1.1% in 2021.
Revision of the Stability Pact. Asked about the timetable for a return to normality in the application of European fiscal rules, the former Italian Prime Minister considered that the return to growth in 2021, an “obvious” fact, should not be the reference. He relied on the recommendations of the European Fiscal Board, which advocates a return to growth equivalent to that observed in 2019, i.e., before the pandemic (see EUROPE 12518/18).
Mr Gentiloni indicated that the revision of the Stability and Growth Pact will resume in the autumn and last until spring 2021. In his view, in the light of the budgetary experience gained during the pandemic, the reflection should be strategic on the type of economic and budgetary policies to be pursued and should not focus on threshold issues such as that of public debt set at 60% of national GDP.
See the Commission’s summer economic forecasts: https://bit.ly/2NZtqOc (Original version in French by Mathieu Bion)