Eurozone finance ministers dial-in for their latest teleconference on Friday faced with projections showing the bloc will suffer its worst contraction in history this year.
The European Commission on Wednesday put the figure at -7.75 per cent of gross domestic product for the eurozone in 2020 — far surpassing the 4.5 per cent contraction that marked the worst year of the financial crisis.
Brussels spring forecast is the first comprehensive look at the economic devastation posed by Covid-19 since the outbreak began (read in full). It was only in February that the commission still expected the eurozone to notch up 1.2 per cent annual GDP growth this year. Now every EU member state is heading for a record-breaking recession as their economies have been forced into hibernation.
Here’s a breakdown of what the commission thinks Europe’s worst recession in recorded history might look like:
It could get worse The commission’s 7.75 per cent growth dive for the eurozone (7.4 per cent in the EU as a whole) is based on the most “benign” outcome where Europe’s economies gradually lift confinement measures in the coming weeks and the virus does not return with a vengeance. In case of setbacks and rising infection rates, the commission has modelled two far more severe scenarios: one where output falls by as much as 15.5 per cent in 2020 if lockdowns are extended further for months; and another 10 per cent of GDP decline if a second wave of the virus hits during the winter.
On the rebound Brussels policymakers have been at pains to stress that the health crisis is a “symmetric” shock that requires all EU governments to pool together their fiscal efforts. But the forecast makes clear that despite the common challenge, the real economic story of coronavirus is the huge differences in economic impact felt across member states. While the likes of Poland and Germany are on course to recover all lost output by the end of next year, the same is not true of Italy, Spain or the Netherlands, whose economies will still be 2 per cent smaller than pre-pandemic levels in 2021. The commission doesn’t downplay the possible consequences of such divergences between weak and strong: “Entrenched economic, financial and social divergences between euro area Member States could ultimately threaten the stability of the Economic and Monetary Union,” they write.
Mind the investment gap The warnings on the dangers of divergence plays into the commission’s push for a pan-European recovery fund to help out the worst hit. One element of the tool will be a mechanism to channel financial support to companies in countries that have less fiscal capacity to offer cash than the likes of Germany or other rich economies. Valdis Dombrovskis, executive vice-president of the commission, told the Financial Times this could involve using an “equity instrument”, currently under internal discussion, which would directly or indirectly support investment. The idea would be to provide solvency support to companies on top of the liquidity support already being offered. He stressed that while the debate was being seen in north-south terms, the recovery fund would also need to help central and eastern Europe.
Greece gets wacked (again) It is one of the tragic ironies of the crisis that Greece — an economy that has endured unparalleled turmoil over the past decade — is at the frontline of the pandemic’s devastation. Despite its government winning plaudits for containing the virus better than many of its counterparts, the Greek economy will still suffer a 9.7 per cent GDP hit in 2020, according to the forecast. That is worse than any single year during its debt crisis (in 2011, Greek GDP fell by 9 per cent). Lost tourism revenues for small businesses account for much of the contraction. The commission notes that although other parts of the economy can restart soon, the tourism and hospitality faces months of prolonged uncertainty that will largely wipe out the lucrative summer months that account for 70 per cent of Greece’s annual tourist revenues.
Chart du jour: Britain’s exit path
Boris Johnson will announce a road map to lift the UK’s containment measures on Sunday that will involve opening up parts of the economy while simultaneously tightening external border controls. It comes as the UK’s death toll has passed 30,000 — making it the second-worst in the world after the US. (see chart)
Coronavirus reads
The Atlantic’s Helen Lewis thinks the merits of having strongmen rulers in a crisis are massively overrated
Arvind Subramanian on why the post-Covid-19 world will be even more “rudderless and unstable” as the globe’s great powers fall to their knees
Local authorities in Brussels have issued dizzying and confusing guidelines on when you should and shouldn’t wear masks, invite people to your home and what counts as “non-essential” travel. Bloomberg reports on some familiar struggles with Belgian bureaucracy
Planet Europe
ECB is likely to resist demands from German judges © AP
Karlsruhe day 2
The fall out from Germany’s constitutional court ruling rumbles on. France’s central bank chief on Wednesday trolled Karlsruhe by insisting the European Central Bank should be even more “innovative” in the fight to raise inflation. The commission meanwhile was more muted, saying it will take its time reading the 100-page judgment before deciding on a response. Investors seem to have digested some of the implications and are selling the euro.
The FT reports the ECB is expected to resist Karlsruhe’s demands to produce a “proportionality assessment” justifying its bond-buying measures. A host of former central bankers have also waded in on the wider debate about the future of central bank independence and the sustainability of a monetary union without the backing of a common treasury (see Benoît Cœuré). Germany’s “wise man” economist Peter Bofinger says it is clear the judgment hampers the ECB’s independence from political interference and lays into the court for “damaging” Germany and the EU.
Constitutional experts are also having a field day. Law professor Miguel Poiares Maduro has some illuminating thoughts on what the commission and ECB should do next and why the EU’s domestic courts are turning increasingly “parochial”:
“[The Karlsruhe judgment] is also likely to lead, not only to increased tensions between national constitutional courts and the ECJ, but between those national constitutional courts themselves (as they will feel equally tempted to become active participants in the ‘negotiation’ of the European grand bargaining on how to answer the current crisis).”
To vote or not to vote?
Poland’s weekend presidential election is off after the ruling Law & Justice government issued a statement saying it will not hold the ballot as planned on Sunday. A new date for the vote — which was being boycotted by opposition forces — will be set after Poland’s supreme court nullifies the May 10 date, said Law & Justice. (Polish Press Agency)
Green or bust
EU and UK Brexit negotiators have found something new to fight about: the Paris climate agreement. Jim Brunsden has more:
“While the EU wants to nail down guarantees about shared green ambitions, Britain argues that it should not have to make such legal commitments in exchange for preferential access to the European market. The officials said that, during last month’s negotiations, a particular point of disagreement arose over how to weave the international climate deal struck in Paris in 2016 into the future relationship talks.”
Dirty money powers
Brussels will on Thursday lay out plans for a new EU authority to fight cross-border money laundering. Commission vice-president Valdis Dombrovskis tells the FT that Brussels will start discussions with member states over whether to create a new supervisor to oversee the anti-money laundering fight or instead hand additional powers to the European Banking Authority. Reuters reports that a revised EU blacklist for third countries at risk of money laundering will not include Saudi Arabia after a spat between Brussels and member states last year.
Dear Ursula
EU governments have been divided for weeks over a planned Covid-19 recovery fund. Now it’s time for the European Parliament to vent its frustrations. The Brussels Briefing has seen a letter from the parliament’s largest group, the European People’s party, to commission president Ursula von der Leyen warning her not to take their support for granted. The letter says the EPP will not accept being “sidelined” in the recovery strategy and wants the parliament fully involved in the decision-making over the fund and the next EU budget. A reminder: a majority of MEPs as well as member states will have to approve the bloc’s next long-term budget and the planned recovery instrument.
Coronavirus news in brief
The UK government could abandon its plans for a centralised Covid-19 tracing app and switch to an Apple and Google global standard instead. Spain’s parliament has extended its state of alert by two weeks. Angela Merkel has announced an “emergency brake” mechanism to reimpose controls over federal states if the virus shows signs of escalating.
Coming up
ECB vice-president Luis de Guindos speaks to MEPs on the economics committee from 9.00 (CET). Green commissioner Frans Timmermans is doing the same with the agriculture committee at the same time. You can join EU migration chief Ylva Johansson in the latest FT/Bruegel livestream from 12.00 (CET). The commissioner will be discussing the dangers of cyber crime during the pandemic. You can send in questions via Sli.do using #EU2020.
mehreen.khan@ft.com; @mehreenkhn
Source: Economy - ft.com
