According to the forecast of the European Commission, there will be a contraction of a record 7.7 per cent for the current year in the euro zone economy because of the economic impact of the novel coronavirus pandemic. The Commission said that inflation will almost disappear there will be steep rise in public debt and budget deficits.
The Commission forecast that there will be no movement in consumer prices even as the economy is set to contracts this year. It also said that it expects the rate of inflation to slow down to 0.2% in 2020, while it expects the rate to rise to 1.1% next year with the return to growth for the euro zone – which is estimated to be at 6.3%. ir said that there will be a drop of 13.3% in investment this year.
“Europe is experiencing an economic shock without precedent since the Great Depression,” European Commissioner for Economic and Financial Affairs Paolo Gentiloni said.
“Both the depth of the recession and the strength of recovery will be uneven, 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.
Budget deficits in the euro zone is expected to rise to an aggregate 8.5% of GDP this year from 0.6% last year because of increased spending by the governments to revive the economies hit by the pandemic and in the absence of reducing private investments to fuel for the economy. The Commission said that it expects the fiscal deficit to shrink back again to 3.5% in 2021.
But the public debt incurred during the pandemic will take longer to shrink. This year, the debt to GDP ratio for the euro zone will increase to 102.7%, the Commission forecast, compared to 86% last year. In 2021, the Commission expects the ratio to decrease to only 98.8% on the average.
“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 said in a research note on the Commission forecasts.
“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.
Within “weeks”, the Commission’s plan for financing the recovery will be ready, Gentiloni said, and added that the plan will be passed by the EU leaders in June. He said that the package will comprise of a mix of grants and long-term loans. He however did not provide any further details on the issue.
The economies that would be the hardest hit by the pandemic will be Italy, Greece, Spain and Portugal. The economies of Luxembourg, Malta and Austria will be hoit sometime later.
“Both the recession and the recovery will be uneven,” Gentiloni said.
(Adapted from Reuters.com)