Euro area Finance Ministers on Friday 21 May welcomed the strength of the economic recovery expected in 2021, which could reach 4.3% of GDP, according to the European Commission’s spring forecast (see EUROPE 12719/2).
This prospect, made possible by the ramping up of vaccination campaigns against Covid-19 in the Member States and the gradual removal of health restrictions, validate the emergency budgetary and economic response put in place from spring 2020 to keep workers in their jobs (30 million people affected by the SURE short-time working instrument in 15 Member States) and to support companies in difficulty (public guarantees and State Aid of up to 4% of EU GDP).
However, the economic crisis, which has caused the euro area’s GDP to fall by 6.6% in 2020, will leave scars.
Commissioner for Economy Paolo Gentiloni spoke in particular of the risk of “permanent damages” caused by a shortage of capital available to finance investment and technological innovation, as well as delays in the training of younger generations and in the retraining of workers from labour-intensive sectors in crisis.
Despite the European Recovery Plan, the investment deficit is expected to rise to 7.2% in 2021 and 8% in 2022, the Commissioner noted.
The recovery involves uncertainties, “will leave scars” and will lead to “divergences’ between sectors and member states, ECB President Christine Lagarde also warned. She predicted more business failures with the lifting of the emergency budget measures and noted that the economic upturn will only lead to an improvement in employment “in 2023, not 2022”.
Committed to maintaining favourable financing conditions “throughout the pandemic”, the ECB will maintain its massive repurchase of government securities (‘PEPP’) “at least until March 2022”, stressed Ms Lagarde.
“To be sustainable, the recovery also needs to be inclusive and limit risks of long-term scarring. That’s why budgetary supports, both at national and EU levels will continue to address the uneven impacts of the pandemic and help those most exposed to the effects of the pandemic”, promised Eurogroup President Paschal Donohoe.
In the face of these uncertainties, the Eurogroup has already agreed that the fiscal stance would remain positive in 2021 and 2022 (see EUROPE 12678/5).
But public budget support will gradually evolve from emergency aid to temporary measures targeting the sectors most affected by the pandemic, such as transport, catering, and/or tourism.
Mr Gentiloni also indicated that the European Commission would present its budgetary and socio-economic policy recommendations on Wednesday 2 June. It should advocate maintaining the Stability Pact’s derogation clause until the end of 2022, as the EU is only expected to return to its pre-crisis level next year.
Some are already thinking in the medium term, while the Next Generation EU Recovery Plan has not yet borne fruit. On his arrival in Lisbon, French Finance Minister Bruno Le Maire called for the national recovery plans—18 of which are currently being examined by the European Commission—to be implemented as quickly as possible so that the first payments can be made “before the end of July”.
According to him, however, “coming back to normal is not the right ambition”. He noted that returning to pre-crisis levels would still mean a 2% loss of activity compared to the GDP trend observed in 2019. To be able to compete with the US and China, “we need to increase Europe’s growth potential” through “new investments”, he added, without explicitly mentioning the need for a second European recovery plan.
See the Eurogroup’s work programme until the end of 2021: https://bit.ly/3f9b7ok (Original version in French by Mathieu Bion)