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EU faces worst recession in its history followed by patchy recovery

May 11, 2020


Abstract : ​The European Union is facing the worst recession in its history and an uneven recovery that will further deepen the socio-economic woes of the south, according to its first full forecast for the post-lockdown era.

The European Union is facing the worst recession in its history and an uneven recovery that will further deepen the socio-economic woes of the south, according to its first full forecast for the post-lockdown era.

The coronavirus containment measures in place since March wiped out a third of the EU's economic activity "practically overnight", the European Commission's outlook shows, and are expected to leave lasting scars on economic output and the labour market.

Eurozone gross domestic product (GDP) will contract 7.7 per cent in a downturn of "historic proportions" this year and then partially rebound to 6.3 per cent growth in 2021, according to the commission's calculations.

Across all 27 EU countries, including the eight outside the eurozone, the contraction is forecast at 7.4 per cent, followed by a return to growth at 6.1 per cent next year.

The sobering figures dwarf the recession following the financial crisis in 2009, when GDP shrank 4.5 per cent.

"Europe is experiencing an economic shock without precedent since the Great Depression," EU Economy Commissioner Paolo Gentiloni said on Wednesday in Brussels.

"Both the depth of the recession and the strength of recovery will be uneven," he added.

Greece, Italy, Spain and Croatia - all countries with stubbornly high unemployment rates and a heavy dependency on tourism - are to be the worst affected. Athens should brace for a downturn of 9.7 per cent, according to the commission.

Poland is facing the smallest contraction of 4.3 per cent.

The unemployment rate across the 19-country eurozone is also predicted to rise to 9.6 per cent in 2020 - up from 7.5 per cent last year - before falling back to 8.6 per cent in 2021.

The situation looks the bleakest for Greece, which can expect its joblessness rate to rise to 19.9 per cent, and Spain, where it will reach 18.9 cent.

Official EU figures released last week already showed that women and young people are disproportionately affected by the current labour market difficulties.

The forecast, which is surrounded by "fundamental uncertainty" according to the commission, is based on the assumption that the coronavirus lockdown measures are to be gradually eased from May onwards and that they will have proved effective.

A second wave of coronavirus infections could wipe a further 3 per cent off GDP, the EU executive stressed.

The calculations suggest that the EU - the world's largest trade bloc - is set to take a GDP hit much higher the global average of 3 per cent predicted by the International Monetary Fund.

Most of the continent is beginning to relax restrictions on citizens' movements, but normal public life is unlikely to resume in the coming months given the absence of a vaccine.

Wednesday's forecast will amp up the pressure on the commission to present an ambitious proposal for a shared EU recovery fund, due in mid-May and expected to be worth at least 1 trillion euros (1.1 trillion dollars).

The 27 member states are divided over how much to throw into the next EU seven-year budget, which is set to be the cornerstone of its long-term response to the crisis.

EU leaders agreed in principle on the fund following a summit last month, but passed the buck back to the commission to work out the crucial, and potentially explosive, details. Any proposal will require the approval of all national governments.

Rome and Madrid have stressed that allocating dedicated EU funds as loans would drive up the already problematic debt levels of many member states, and are calling for grants instead.

Fiscal hawks such as Germany and the Netherlands are reluctant to throw more into the EU pot for what domestically might be seen as a hand-out or a back-door move towards closer fiscal integration.

The commission has said the proposal will likely involve a combination of grants and loans.

European Parliament President David Sassoli urged the bloc's institutions and leaders "to be courageous and ambitious" on the plan on Wednesday.

"The crisis has increased the imbalance between European regions and the recovery plan should help to fill this gap," the Italian official added.

Eurozone finance ministers are due to hold a video conference on Friday. The recovery fund is not on the agenda, though ministers could well raise it, according to an EU official.

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Keyword: EU recession

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