EU faces ‘existential threat’ if coronavirus recovery is uneven
The risk of an uneven economic recovery from the coronavirus crisis poses an “existential threat” to the European Union, one of its most senior economic policymakers has said.
Paolo Gentiloni, a former Italian prime minister and now the EU’s economy commissioner, said the bloc also had a “historic opportunity” as it charts a plan to rescue Europe’s economy.
In an interview a few days after the commission said Europe had entered “the deepest economic recession in its history”, Gentiloni said the EU needed a “sound recovery plan” to avoid the risks of economic division. Shuttered shops and factories, grounded planes and stay-at-home consumers as a result of lockdown restrictions mean the EU economy is expected to shrink by 7.5% in 2020, a deeper fall than the 2009 financial crisis.
Gentiloni is concerned that countries do not have the same resources to recover from this economic shock. The hardest hit countries – Greece, Italy, Spain and Croatia – face falls in economic output (GDP) in excess of 9% in 2020, while Germany’s economy is set to contract by 6.5% and Austria’s by 5.5%. Meanwhile countries have varying levels of state resources to rescue ailing companies and pay workers’ wages – emergency measures that have become easier since Brussels relaxed state aid rules to deal with the crisis.
Gentiloni said state aid requests from EU member states were very imbalanced. “What is clear is the uneven level of the recovery and the risks this creates to our single market and the necessary convergence, especially within the euro area. This is something that I could even define as an existential threat to the building of the Union,” he told a group of European newspapers, including the Guardian.
“If we want to look from a more optimistic way it is not only an existential threat but also in some sense a historic opportunity to fill the void we have in common tools of economic and fiscal policies.”
The 19-country eurozone’s unfinished foundations were exposed by the 2008 global financial crisis, which morphed into a debt crisis for Europe’s weakest economies. A decade later policymakers continue to call for deeper integration, such as a eurozone budget and finance minister.
Gentiloni, however, said he was not talking about a finance minister when he spoke of “common tools” in economic policy. Instead, he gave the example of an EU plan to borrow and spend €100bn (£88bn) to protect workers’ jobs across the EU. Similar plans were discussed eight to 10 years ago “and the discussion went for years and years without any chance to reach agreement,” he said. “And in the end, during this crisis we delivered.”
The European commission is drawing up a recovery plan after EU leaders in April called for a response to the exceptional economic shock. Ursula von der Leyen, the commission’s president, has said the plan would include €1tn of support, but it remains to be decided where the money will come from. The recovery plan will be folded into the EU’s next seven-year budget, which was the source of bitter disagreements before the pandemic began.
One unresolved question is the balance in the recovery plan between loans and grants. France, Spain and Italy are seeking some financial transfers, while Germany, the Netherlands and other northern countries prefer to give support through loans.
Gentiloni said he could not specify the split between grants and loans, but made clear his support for a certain amount of financial transfers. He said some sectors, such as tourism, and unspecified geographical areas needed intervention “in the principle of solidarity of this kind, grants”. Secondly, he added, relying too much on loans would push countries deeper into debt. He said he was optimistic about the debate. “This principle of a mix of grants and loans is more understood now than it was a month ago. The crisis has changed the awareness of the importance of solidarity.”
Adding urgency to the need for a recovery plan, he said, was an expected shortfall of private investment €800bn in 2021 and 2022, funds that should have kickstarted Europe’s green deal and main answer to the climate emergency. The EU’s strategic goals, he said “need to be supported, strongly supported now”.
The commissioner also said he was worried about a no-deal from negotiations on a post-Brexit future with the UK, which is one of the “downside risks” in the commission’s latest economic forecast for the UK and EU. “No deal is a lose-lose situation,” he said reiterating the commission’s widely shared view that economic difficulties would be worse for the UK. “Obviously we hope that in both cases we will not have this downside risk materialise.”
The UK economy is forecast by the commission to shrink by 8.3% in 2020, but failure to reach an agreement would further dampen economic growth.