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The recession in Europe will be worse than was expected two months ago, but that doesn’t mean that the bounce back expected next year will be any stronger than forecast. The latest economic forecast from the European Commission should make for depressing reading for European Union policy makers, even though its publication comes after other, similarly updated, numbers from international organizations such as the Organization for Economic Cooperation and Development or the International Monetary Fund.
The EU now sees eurozone gross domestic product slumping by 8.7% this year, and up 6.1% in 2021. The EU’s GDP would fall by 8.3% in 2020 and increase by 5.8% next year.
But that isn’t in itself the main source of concern for the region’s governments. The real problem they have to deal with is that the coronavirus outbreaks hit Europe unequally, with some countries faring much better than others.
As expected, Italy, Spain and France will be the European economies most affected by the consequences of the pandemic, with their economies all expected to shrink by around 11% this year. At the other end of the spectrum, countries like Poland or Denmark will see their GDP down by about 5%. And among the largest economies, Germany stands out, with its economy falling by 6.3%, after the government emerged as the most successful in dealing with the pandemic — and the boldest in devising a stimulus plan to counter its effects.
So it has now become obvious that the pandemic hasn’t hurt everyone equally. The differences have to do with the member states’ economic and social characteristics, their variable degrees of openness to international travel, their respective populations’ responses to the many forms of lockdowns ordered here and there, and the sizes of their fiscal stimulus plans to cushion the pandemic’s consequences.
The European Commission notes that its forecast didn’t take into account the impact of its proposal for a €750 billion joint recovery fund. That is because it couldn’t: The plan is still a matter of vigorous debates, with a few EU governments fearing the domestic political impact of agreeing to what would amount to transfers to the neediest countries.
But the EU forecast also illustrates another problem: the Commission’s proposals of a fund that would borrow on the markets to extend mostly grants to the governments hardest pressed by the crisis could amount to helping those who would need it least.
Poland, in particular, is a case in point. It is Europe’s country least affected by the crisis, but would receive almost 9% of the proposed recovery fund’s proceeds, even though it only accounts for 3.8% of the EU’s GDP. That is because the criteria used by the Commission are based on precrisis indicators (such as GDP per capita, or the level of unemployment).
That type of distortion will be used by opponents of the fund, led by the Dutch government, to keep arguing that it better act through loans (to be repaid) instead of grants. European finance ministers are scheduled to take up the topic and bicker again at another virtual meeting at the end of the week.
This week’s forecast should be another reason for Europe to act quickly and devise a proper joint fiscal response to the crisis. But the numbers may also be used to strip the proposed fund of much of its firepower.
