A look at Europe: recession and inflation to vanish-Commission

The recent data released by the European Commission on the eurozone are not so promising: an economic recession will hit the record of 7.7% this year because of the Covid-19 pandemic, inflation will almost disappear, and public debt and budget deficits will balloon.

In other words, the economy is expected to dramatically contract this year and consumer prices will almost stagnate the Commission forecast.

Specifically, the inflation rate will slow to 0.2% in 2020, before accelerating to 1.1% next year, when the eurozone is to return to growth of 6.3%. The investment will plunge 13.3% this year, it announced.

“Europe is experiencing a financial shock without precedent since the Great Depression,” European Commissioner for Economic and Financial Affairs Paolo Gentiloni claimed.

“Both the depth of the recession and the strength of the recovery will be unequal, conditioned by the speed at which lockdowns can be lifted, the importance of ... tourism in each economy and by each country’s financial resources,” he said.

With the European governments boosting their energies for the economy, the effort to keep economies alive will widen budget gaps in the eurozone to an aggregate 8.5% of GDP this year from 0.6% last year, before the deficit shrinks again to 3.5% in 2021.

It is expected that a surge in public debt will take longer to undo. The Commission is expecting the eurozone debt to jump to 102.7% of GDP this year from 86% last year and recede only to 98.8% in 2021.

“We see governments running fiscal deficits ... as essential for a robust and broad recovery and see European support as particularly important for the periphery to be able to participate in this recovery,” Morgan Stanley bank published in a research note on the Commission prognostications.

“Proposals for the next EU budget – which will encompass a recovery fund – are still being drafted. The details, particularly on size and breakdown of loans/grants, will be key,” the bank said.

Economy commissioner Paolo Gentiloni said he was confident EU leaders would approve a recovery initiative in June, Image credit European Commission)

Gentiloni also added that the Commission’s plan for financing the recovery would be ready “in weeks” and that it would be approved by EU leaders in early-June. It would be a mix of grants and long-term loans, he said, but he refused to give more details.

Italy, Greece, Spain and Portugal will be among the hardest hit by the economic effects of Coronavirus. Luxembourg, Malta and Austria will weather the shock better.

“Both the recession and the recovery will be uneven,” Gentiloni said.

Greek GDP will contract the most, by 9.7%. Italy will record the second deepest recession, 9.5%, and Spain 9.4%.

With a closer look at Italy, the EU country hardest hit by the coronavirus, the deficit will surge the most to 11.1% of GDP this year from 1.6% last year but will fall back to 5.6% in 2021. The public debt will also record the biggest increase this year, to 158.9% of GDP from 134.8% in 2019. It is seen falling to 153.6% in 2021, the Commission said.

Spain’s deficit will be 10.1% this year, up from 2.8% in 2019. France will be close behind with a deficit of 9.9% this year. The Commission expects it to fall to 4.0% next year.

Is it the case to say the hope we need to hold on is an unexpected financial progression when the lockdowns will be completely lifted by all European countries?