In Depth

What the EU recession means for the bloc’s future

Second wave of coronavirus threatens to derail recovery plans

The European Union is facing an unprecedented economic downturn from which the bloc may take many years to recover, experts are warning.

The European Commission said in its summer economic forecast, released in July, that the EU economy was expected to contract by 8.7% in 2020 as a result of the coronavirus pandemic, plunging the bloc into “a deep recession”.

So with Brexit around the corner and a major economic stimulus package delayed until next year, could the so-called coronavirus recession change the EU forever?

What is the current situation? 

Strict lockdown measures aimed at halting the spread of the virus “brought economic activity to a shuddering stop at the height of the pandemic’s first wave in the spring”, the Daily Express says. 

“Most measures across Europe were relaxed as infection rates fell sharply, with recent data suggesting the continent had coped better with the coronavirus-induced recession better than initially feared,” the newspaper adds.

But economic figures suggest that hopes of a miraculous recovery are misplaced.

Amid a “sharp slowdown in service sector activity” as Covid infections rise, IHS Markit chief business economist Chris Williamson is predicting that the EU may fall back into recession within the next three months, The Guardian reports.

The fallout of the pandemic is already hitting individual countries in the trading union hard, with the Bank of Spain this month downgrading its GDP forecast to suggest a contraction of up to 12.6% this year, The Telegraph says. France’s outlook is also gloomy, with a forecast of -10% for the year.

Bert Colijn of banking and financial services firm ING says that “alarm bells should be going off about the pace of the recovery at the moment” as the number of new Covid-19 cases continues to climb across Europe.

“For governments and the European Central Bank, this will be a wake-up call, if they needed one,” he adds.

How long could the economic crisis last?

Experts believe the EU will be mired in economic difficulties for quite some time. Brussels is getting mixed messages from the member states over further potential lockdown measures, and this uncertainty is causing consumer confidence to plummet across the EU27.

“If the first stage of the coronavirus crisis was precipitated by state-mandated lockdowns, the coming months are likely to be characterised by consumer fear and government restrictions on industries like travel, tourism, entertainment, hospitality and retail,” Politico says.

As the news site notes, “most experts, including those at the Bank of England and the European Central Bank, don’t expect global output to recover to its pre-crisis levels until the end of 2021 - unless there is a major second wave of the virus this winter, and then all bets are off”.

The EU is no stranger to slow growth, having struggled in the wake of the 2008 financial crisis. According to the European Commission, even before Covid, GDP per capita across the EU had still not recovered to pre-crisis levels.

How is Brussels responding?

On 27 May, the European Commission presented a €750bn (£687bn) economic stimulus plan intended to help repair the economic and social damage wrought by the coronavirus pandemic.

Commission President Ursula Von der Leyen said the recovery plan would pave the way for an environmentally friendly reconstruction of parts of EU industry.

Member states, especially those more affected by the pandemic, “hoped to receive the EU funds by spring next year”, EurActiv reports. 

But EU sources warned last week that the approval process was taking longer than anticipated, with the European Parliament and the Council “yet to agree on the own resources that would allow for increasing the EU budgetary threshold and borrow the €750bn from the markets”, the news site says.

A key point of contention is the suggestion that the package may allow for future mutualisation of member states’ debts in order to lighten the burden on harder-hit countries. This could take the form of eurobonds; fixed-income debt instruments that in effect allow debt to be shared by the EU27. 

While this idea has long been championed by France and Italy, other powerful but more financially conservative players in the EU - including the Netherlands and Germany - remain unconvinced.

So what is the outlook for the EU?

The EU has praised its own response to the pandemic and taken an optimistic view of its future strategy.

“Measured against realistic expectations, Europe’s response to the crisis has been impressive,” the European Central Bank says. “It has substantially exceeded the most recent benchmark – its response to the sovereign debt crisis – and broadened the boundaries of what is possible should we be struck by such dramatic shocks again.”

However, Swedish economist Fredrik Erixon says that faith in the bloc is waning from within. In an article for The Spectator, Erixon writes that “a recent poll in Italy found that two-thirds now view their EU membership as a disadvantage”, and notes that the prime minister of Spain recently said: “Either we rise to this challenge or we will fail as a union.”

A further shadow was cast over the EU this week, when the Tourism Task Force of MEPs issued a joint statement about the prospects of the sector across the continent. 

Higlighting inconsistencies in the bloc’s response, the MEPs said that six months after the pandemic hit, “there are still no common criteria in the EU on how to handle and live with this pandemic”. 

The group pointed to a ”lack of universal hygiene and health protocols, no common rules for testing or on how to assess the risks [and] no adhering to the free movement principle” as major flaws that could end up costing the EU27 dearly.

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