Europe’s success in managing the COVID-19 health crisis is not enough to save its economy
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Europe may be past the worst of the coronavirus pandemic, but the damage will linger.
The eurozone economy is now expected to contract by 8.7% this year, the European Commission forecasts, a full percentage point lower than its outlook from just two months ago.
Economies across Europe began emerging from strict lockdown orders over a month ago, but restrictions are still widespread—from airports to restaurants and office buildings. Those measures have so far kept the COVID-19 health crisis to a more manageable contagion, but it’s triggered a worse than expected economic crisis throughout the 19-country bloc that uses the euro.
The commission now believes a 2021 recovery is in the cards, but that it will be extremely uneven across countries. France, Italy, and Spain will see GDP hits of 10% or more this year; Germany will shrink by about 6.3%. As such, the eurozone GDP is expected to contract this year for the first time since 2013.
Coming into the year, the commission had already set low expectations, predicting in November “a protracted period of subdued growth and low inflation in the context of high uncertainty.” And then the coronavirus hit. Weak growth turned into contraction, and low inflation has shrunk further. The uncertainty remains as high as ever.
“The economic impact of the lockdown is more severe than we initially expected,” said Valdis Dombrovskis, a commission executive vice president for the economy, said in a statement. “We continue to navigate in stormy waters and face many risks, including another major wave of infections.”
Dombrovskis and other commission officials used the report to pitch member states on the need to ratify a vital 750 billion–euro coronavirus aid package to help the bloc’s hardest-hit economies. Heading into a crucial July 17–18 summit, it’s unclear if that package will pass, leaving yet another dark cloud over the continent’s fortunes.
The commission also laid out in today’s report a list of “exceptionally high risks” that include, first and foremost, the uncertainty of managing a pandemic that’s proved difficult to control and impossible, without a vaccine, to eradicate. Even assuming “that lockdown measures will continue to ease and there will not be a ‘second wave’ of infections,” the commission sees “long-term scars” in the labor market and that “liquidity difficulties could turn into solvency problems for many companies.”
Beyond that, it sees risks in global trade becoming more protectionist and a failure to reach a mutually beneficial post-Brexit trade deal with the United Kingdom.
Investors seemed to take the news to heart, sending European equities lower on Tuesday.
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