EU predicts ‘deeper recession’
Bloc leaders call for quick decisions on activating rescue package next week
The European Union painted a gloomier picture on Tuesday for its economic growth in the coming two years, putting pressure on EU leaders meeting next week in their bid to reach an agreement on an ambitious recovery plan.
The 19-member eurozone will contract by 8.7 percent in 2020 and grow by 6.1 percent in 2021, while the 27-member EU economy is forecast to shrink by 8.3 percent this year and expand by 5.8 percent next year, according to the Summer 2020 Economic Forecast.
The spring forecast in early May projected the euro area economy to contract only 7.7 percent and EU economy to shrink 7.4 percent. Its forecast for 2021 growth was also a bit more rosy.
The European Commission forecast is still better than the one released by the International Monetary Fund two weeks ago. It forecast a 10.2 percent contraction this year for the euro area.
“The economic impact of the lockdown is more severe than we initially expected. We continue to navigate in stormy waters and face many risks, including another major wave of infections,” said Valdis Dombrovskis, the European Commission executive vice-president.
Italy, Spain and France, the three largest EU economies after Germany, will experience the worst economic recession among euro area members, according to the latest forecast. Italy’s economy will contract by 11.2 percent this year while Spanish economy will contract by 10.9 percent.
France will be the third worst performer with its economy to decline 10.6 percent. That contrasts with the spring forecast of a contraction of 9.5 percent for Italy, 9.4 percent for Spain and 8.2 percent for France.
Comparatively, economic contractions for Germany, the Netherlands and Poland are forecast to be milder.
Uncertainties remain
The European Commissioner for the Economy, Paolo Gentiloni, said on Tuesday that several uncertainties are still surrounding the summer forecast.
He said the assumptions about the pandemic could still be too optimistic, especially in the absence of a vaccine and treatment options for COVID-19. The labor market could also be affected worse than expected and companies could be hit hard by solvency problems.
Gentiloni, a former Italian prime minister, warned that failure to reach a trade deal between the EU and the United Kingdom could also negatively affect both sides.
“This is why it is so important to reach a swift agreement on the recovery plan proposed by the commission — to inject both new confidence and new financing into our economies at this critical time,” he said, referring to the 1.85-trillion-euro ($2.08 trillion) recovery package put forward by the European Commission in late May.
The package, which includes 1.1 trillion euros from the EU’s long-term budget and 750 billion euros to be raised from the financial market, will be a major subject when leaders of EU member states meet for a summit in Brussels over July 17-18.
Early efforts to reach a deal have failed. The so-called Frugal Four, comprising the Netherlands, Denmark, Sweden and Austria, want more loans and less grants.
The European Commissioner for Budget and Administration Johannes Hahn warned on Tuesday that “we will enter into difficulties” if EU leaders fail to reach an agreement next week.
Italian Prime Minister Giuseppe Conte on Tuesday urged that support measures in the recovery package be activated rapidly.
“We won’t accept a weak compromise” on the recovery fund, Conte told reporters in Lisbon, Portugal.
“The response has to be a strong, ambitious political response,” Conte said, according to EURACTIV.com.
Referring to the proposed recovery plan, Gentiloni said: “The rapid implementation ... built around ‘Next Generation EU’, which is not calculated in its effect in our forecast, would help to brighten the economic outlook, including by quickly delivering a boost to confidence.”