As a consequence of the COVID-19 pandemic, the economy of the European Union (EU) will register the biggest contraction in its history, according to the macroeconomic forecasts of the European Commission (EC).
In its most recent report, the institution forecasts a fall of 7.4% in the Gross Domestic Product (GDP) of the group of 27 nations, and 7.7% in the GDP of the 19 nations of the Eurozone.
«Europe is facing an economic crisis unprecedented since the Great Depression», said Paolo Gentiloni, the economic commissioner for the European Commission, referring to the recession of the 1930s.
«It is now quite clear that the EU has entered the deepest economic recession in its history», said Gentiloni, while warning that the economic descents will be greater than those detected in 2009 during the financial crisis, when the GDP of the community club and of the nineteen countries that share the euro as currency fell 4.5%.
In a statement, the EC indicated that the COVID-19 pandemic represents a «great shock» for the global economy and the EU «with very serious socio-economic consequences». He added that despite the «rapid and comprehensive» political response at Community and national levels, the European Union will experience «a recession of historic proportions» in 2020.
The fall in the first quarter
The Brussels-based Commission reported that due to measures implemented by the governments of the old continent to contain the coronavirus, including the confinement and closure of shops and the stoppage of productive activities, the EU economy fell sharply in the first three months of 2020.
For example, the GDP of the 19 countries of the Eurozone as a whole contracted 3.8% between January and March compared to the previous quarter; and 3.5% in the case of the EU, according to figures from the European statistics office Eurostat.
The data show «the most important decreases since the beginning of the time series in 1995,» Eurostat said in a statement, which put the contraction in GDP at 3.3% compared to the same period in 2019.
According to statistics, between January and March there was a fall of 5.8% in the GDP of France, of 4.7% in that of Italy and of 5.2% in that of Spain.
“Europe is experiencing an unprecedented economic impact in modern times. It is vital for the European Union to rise up to the challenge», said Paolo Gentiloni.
Although the crisis caused by COVID-19 affects all countries in the world, especially Europeans, its impact and the speed of recovery will not be the same everywhere, the EC warned.
By country, the biggest falls in GDP this year will take place in Greece (9.7%), Italy (9.5%), Spain (9.4%), Croatia (9.1%) and France (8.2 %).
While among the least affected are: Poland (4.3%), Luxembourg (5.4%), Austria (5.5%), Malta (5.8%) and Denmark (5.9%). Although Germany and the Netherlands are also part of this group, with reductions of 6.5% and 6.8% respectively, the economic blow contrasts with the strength of their economies.
According to the Commission, recovery will depend on the evolution of the pandemic in each country, but also on the structure of their economies and the national capacity for political response.
“The depth of the recession and the strength for the recovery will differ from country to country, depending on the speed with which they are able to lift containment measures; the importance in each economy of services -such as tourism- and the financial resources of each state», said Gentiloni.
He warned that these divergences pose «a threat» to the single market and the Eurozone, although they can be mitigated «through decisive and joint European action», EFE reported.
More unemployment and deficit
In addition to the fall in GDP, Brussels forecasts that the unemployment rate in the 27 countries of the European Union will skyrocket from 6.7% in 2019 to 9% in 2020, to stand at 7.9% a year later .
In the case of the Eurozone, an increase is expected from 7.5% in 2019 to 9.6% this year, although it could rise to 8.6% in 2021.
The EC warned that some member states will see «more significant» increases in unemployment than others, and considered that the countries where there are large numbers of workers with temporary contracts or who are dedicated to the tourism sector, such as Spain and Italy, are «particularly vulnerable».
Similarly, he pointed out that young people entering the labor market will have greater difficulties in obtaining a first job.
But apart from unemployment, the community executive also contemplates that the public debt and deficit increase as a consequence of the support measures for companies and workers approved by the governments of the member states, which represent an increase in public spending.
For this reason, the public deficit in the euro countries will go from 0.6% of GDP in 2019 to 8.5% this year, although it will fall to 3.5% in 2021. While in the EU it will rise from 0.6 % of the previous year to 8.3% in 2020, to decrease to 3.6% in 2021.
Additionally, the Eurozone’s public debt is expected to grow from 86% of GDP registered in 2019 to 102.7% this year, while in 2021 it will drop to 98.8%. In the twenty-seven countries it will rise from 79.4% in 2019 to 95.1% in 2020, and will decrease to 92% next year.
«Inflation will fall to 0.2% in the common currency partners this year and to 0.6% throughout the Union due to the decrease in demand and the price of oil, but it will rise to 1.1% and 1, 3% respectively in 2021”, EFE reported.
Rebound in 2021
Although the figures are not at all positive, the European Commission raised the hope that in 2021 the Eurozone economy will have an average recovery of 6.3%, while the 27 of the EU would advance 6.1% in its GDP. .
However, Valdis Dombrovskis, one of the organization’s three vice presidents, was not overly optimistic. «At the moment, we can only provisionally establish the extent and severity of the coronavirus shock in our economies», he said, quoted by France 24.
«The EU will come out of 2020 with higher debt, which could slow investment and growth. We should support equity and similar investments to protect workers and the financial sector. And work harder to create a Capital Markets Union to diversify sources of financing for companies», Dombrovskis said on his Twitter account.
The economic rebound that the European Commission is contemplating with reservations for 2021 depends on several factors: that the population containment measures adopted to stop the spread of the coronavirus are gradually lifted, that the pandemic is then under control, and that the «unprecedented» budgetary plans and monetary support to the economy of each country and the region are effective.
Joint plan «now or never»
The European Commissioner for the Economy took advantage of the publication of the alarming economic data to increase pressure on EU governments and motivate them to adopt a joint recovery plan that allows them to face and emerge from the recession.
“We need a sufficiently comprehensive recovery plan, aimed at the most affected economies and sectors, and that can be rolled out in the coming months. If not now, when?», Paolo Gentiloni said.
«We have been arguing for ten years without much result in common fiscal instruments. But it is now or never. Because the risk that we run is evident. Yes, we have already decided on credit-based fiscal instruments, the half a trillion of the Eurogroup. But we need more than that. And what we need is a mixture of long-term credits and transfers», he stressed.
The official raised the need to establish a recovery fund based on transfers and long-term credits, which should focus on the countries and sectors most affected, such as tourism.
He explained that «the fund has to be a mixture of credits and transfers», with an emphasis on small and medium-sized industries (SMEs) and in sectors where the crisis and closings have been most severe.
Likewise, he called for preventing that a common crisis should end up causing very different effects for the countries.
For her part, the president of the European Central Bank (ECB), Christine Lagarde, warned the 27 EU leaders about the risk of acting «too little too late», since in the worst case scenario the economic recession could reach is 15%.
Although the European leaders asked the head of the European Commission, Ursula von der Leyen, to present a proposal for a reconstruction plan; The application of this recovery instrument linked to the bloc’s budget for 2021-2027 could be threatened by deep divisions between the countries of the South and the North.
Countries such as Spain or Italy suggest that funds must be available under the concept of a lost fund, so as not to increase their debts, while nations such as the Netherlands or Austria require that it be in the form of loans.
Will Trump eliminate the tariffs?
To counteract the economic effects caused by the COVID-19 pandemic, European countries must also expand their international trade, but to increase their operations they face an obstacle: tariffs imposed by the United States Government.
For this reason, the European Trade Commissioner, Phil Hogan, called on the Donald Trump administration to eliminate tariffs imposed on products from the old continent, such as steel or aluminum.
«I hope that the US appreciates that tariffs do not work because they reduce economic growth, economic activity and limit jobs», he said, quoted by Diario Libre.
Hogan insisted that «what we are trying to do is reopen our economies and turn economic activity into growth».
The Commissioner wrote to the head of US Foreign Trade, Robert Lighthizer, with the aim of «identifying some principles on which the EU and the US could work together, in areas where trade policies could have an impact”.
For analysts, this request could fall on deaf ears, since for Trump the recovery of the American economy is his only hope for victory in the November presidential elections.
The extreme right-wing will probably choose to reinforce his protectionist policies associated with his «America First» campaign.