Via Financial Times

The coronavirus crisis threatens the stability of the eurozone and risks exacerbating economic and social divisions within the EU, the European Commission has warned, as it forecast a collapse in economic output this year.

The commission’s spring forecast, published on Wednesday, predicted that under “benign assumptions” EU output will fall 7.4 per cent this year, the steepest slump in the bloc’s history, with a rebound of only 6.1 per cent in 2021. The EU is heading for an €850bn shortfall of investment in 2020 and 2021 compared with the position outlined in its autumn forecast, Wednesday’s update showed.

The commission renewed its call for a pan-European “recovery plan” to help compensate for diverging fiscal firepower between member states. This could include a mechanism to address imbalances in the amount of public support that is being funnelled to companies in different parts of the region, said Paolo Gentiloni, the EU’s economics commissioner.

While some economies — including Germany — are expected to see relatively quick rebounds in activity, the commission expects others to struggle to regain growth due to permanently depressed levels of investment and hits to industries such as tourism. 

In the absence of a co-ordinated effort by member states, the crisis risks leading to “severe distortions within the single market and to entrenched economic, financial and social divergences between euro area member states that could ultimately threaten the stability of the economic and monetary union”, the report said.

Greece, Italy and Spain are on course for the steepest falls in gross domestic product this year, all tumbling more than 9 per cent according to the commission. France is also hard-hit, with a contraction of 8.2 per cent, while Germany suffers less, with a fall of 6.5 per cent in output followed by a rebound of 5.9 per cent the following year.

READ ALSO  PIMCO Founder Bill Gross Accused Of Blasting 'Gilligan's Island' Theme Song On Loop To Torture Neighbors

Poland is set to suffer the smallest decline in activity, according to the outlook, with output falling 4.3 per cent, before rebounding 4.1 per cent. The commission also published forecasts for a number of non-EU countries, including the UK, which it said was on course for an 8.3 per cent decline in GDP, followed by a 6 per cent increase in 2021.

Overall, next year’s rebound could leave the European economy about 3 per cent below the level implied by the EU’s autumn forecast. But the outcome could be even worse: for example, another surge in infections could reduce GDP by an additional 3 percentage points, the commission said.

“The danger of a deeper and more protracted recession is very real,” it added. “The point forecasts presented in this document should therefore be understood as just one among several possible scenarios.”

The commission is seeking to overhaul plans for its upcoming seven-year budget to front-load spending aimed at restoring growth, while raising debt in markets to fund an EU recovery instrument.

Brussels is concerned about the vastly different levels of government support to businesses in the bloc; larger richer member states are able to pump billions of state aid into ailing companies, while smaller cash-strapped economies have fewer resources. Germany accounted for half of state aid approved by the commission during the coronavirus crisis so far, according to Brussels’ data.

Mr Gentiloni said this had created “a risk of hurting the level playing field in the single market”. “We are discussing the possibility of an intervention also on equities, and on what kind of companies [to help]. This could be a good tool to rebalance the risks of these imbalances,” he added. 

READ ALSO  Sorority Apologizes For Congratulating Amy Coney Barrett

Among the key points of contention in the recovery plan is the balance between grants and loans handed out by the commission. Northern member states have said they are uncomfortable with the idea of the commission borrowing money in the markets and then handing this to member states as non-repayable loans.

Mr Gentiloni said that, while grants would indeed be important for the worst-affected sectors and regions, loans could be of help depending on their maturity. A two-year loan was very different from a 40-year loan, he observed.

The projections came as a series of new data releases illustrated the scale of the crisis facing the eurozone economy.

Eurozone retail sales contracted at the fastest pace on record in March as non-essential shops closed across the bloc in an attempt to limit the spread of coronavirus. The volume of retail sales dropped an unprecedented 11.2 per cent compared with the previous month, according to Eurostat data.

Meanwhile, service sector executives in Italy and Spain reported a record downturn in activity. Purchasing managers’ indices covering the eurozone’s third and fourth largest economies tumbled last month to the lowest level on record, signalling a rate of contraction that far exceeds that recorded during recent recessions, including the global financial crisis.

And German factory orders suffered a record monthly decline of 15.6 per cent in March, as the disease froze the activities of many businesses and consumers worldwide.

Additional reporting by Martin Arnold and Valentina Romei