How Will Europe Weather This Storm?

Though countries are exiting lockdowns, a great deal of economic pain is on the horizon as a result of Covid-19. While many are hoping for a speedy recovery in 2021, a resurgence of the virus could derail the best laid plans

The coronavirus pandemic has left nothing and no one unscathed. As lockdowns are gradually lifted, the scale of Europe’s economic damage is becoming clearer by the day. The continent is expecting its worst recession since World War II with forecasts predicting an economic contraction even greater than the blow faced during the Great Depression.

Economic pain stemming from quarantine and self-isolation was anticipated upon their onset by governments across the globe, and measures that proved necessary to curb the loss of life. However, countries that did not impose a lockdown are also facing an economic downturn due to the interconnected nature of global supply and demand. Sweden made headlines for not imposing a mandatory confinement of its population, but even so, The National Institute for Economic Research (NIER) said in a statement that the country’s economy is set to shrink 7 per cent this year, with unemployment rising to 10.2 per cent.

This is not very different from dire predictions made by the International Monetary Fund, which forecasts that both Germany and the UK will see their economies contract in 2020 by 6.5 and 7 per cent, respectively. France expects to experience a contraction of 7.2 per cent and Spain 8 per cent, with the economic slump in Italy forecast to reach 9.1 per cent of GDP. Meanwhile, the fund anticipates Greece will suffer a whopping 9.7 contraction – the worst prediction for the entire eurozone.

According to Eurostat, the first quarter revealed that overall EU GDP dropped by 3.5 per cent. But the decrease was starker for the eurozone, which suffered a 3.8 per cent quarter-on-quarter contraction. “These were the sharpest declines observed since time series started in 1995,” Eurostat said in a statement.

French GDP fell by 5.8 per cent in the first quarter, officially pushing it into a recession after small negative growth was recorded in the final quarter of 2019. It is the biggest drop in GDP since 1949 according to the country’s INSEE statistics agency – a much steeper dive than the 1.6 per cent decline observed in the first quarter of 2009 when the financial crisis hit. “GDP’s negative evolution in Q1 2020 is primarily linked to the shut-down of ‘non-essential’ activities in the context of the implementation of the lockdown since mid-March,” INSEE said.

While everyone expected to feel some pain, France’s slump outperformed even the most concerning expectations, which predicted an approximate 3.5 per cent contraction. INSEE has reported that consumer spending, usually the driver of the French economy, dropped 6.1 per cent in the first quarter from the previous three months, while business investment plunged 11.4 per cent – contributing to the grim results. France expects its economy to contract 8 per cent in 2020. The government has pushed through an aid package worth 110 billion euros – or 4 per cent of the country’s overall GDP – to help companies and workers weather the crisis. INSEE estimates French economic activity is operating at about two-thirds of normal levels, and more than half of private sector workers have been put on state-subsidised furloughs, which were instituted to help prevent mass layoffs.

Italy has also officially entered a recession, with GDP decreasing by 4.7 per cent following a 0.3 contraction in the final quarter of 2019, according to the ISTAT statistics agency. This is the country’s worst reading since 1995, when Eurostat began its monitoring. Italy’s public debt is also set to hit almost 160 per cent of GDP, and the nation is expected to face a longer road to economic recovery than some of its neighbours despite the 6.5 per cent growth anticipated in 2021.

The European Commission has estimated that Italy’s deficit will jump to 11.1 per cent this year, the highest in the union. This number is well beyond the bloc’s 3 per cent ceiling, although that limit has been suspended during the pandemic, with the eurozone’s 19 countries forecast to significantly breach this limit in 2020.

The INE statistics agency has recorded a 5.2 per cent contraction in Spain as well. While not landing Spain in recession territory, thanks to growth in the final quarter of 2019, it is still the worst reading since records began in the 1970s. “The situation caused by COVID-19 in Spain and the impact of measures taken to protect the health of the population since March have introduced an extraordinary difficulty to measure the economic evolution of the whole of the quarter,” INE said in a statement on its flash estimate.

And Greece, which only recently exited a decade of austerity, has taken a significant economic knock-back. According to the EU Commission’s Spring 2020 Economic Forecast, Greece has taken the worst hit in the entire eurozone. It predicts that the country’s GDP will contract by 9.7 per cent this year – the highest out of all EU nations.

European Central Bank President Christine Lagarde warns that the worst is yet to come and fears that overall eurozone GDP could contract by 15 per cent this quarter. “The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime,” she said.

The eurozone economy is expected to shrink 7.75 per cent in 2020, and total unemployment could climb to 9 per cent. This is not even the worst case scenario; should there be a second wave of the pandemic, it could shave another three points off Europe’s economic output. The commission has called it a “recession of historic proportions”. During the financial crisis in 2009, Europe saw a contraction of only 4.5 per cent and 10 per cent unemployment rates by comparison. While unemployment is not expected to be worse than what was experienced during the financial crisis, it will be harder for young people to land their first jobs. Meanwhile, the ongoing threat of tariffs on trade goods between the EU and the UK could also dampen potential growth.

An yet, when Europe suffers, it doesn’t do so alone. The continent is the United States’ top trading partner and China’s second largest. It is also the biggest foreign investor in sub-Saharan Africa. A prolonged recovery would spell misery for all these interlinked economies, and the citizens dependent on them.

“The euro area is facing an economic contraction of a magnitude and speed that are unprecedented at peacetime,” says Christine Lagarde, president of the European Central Bank. Lagarde predicts that the eurozone’s GDP could contract by as much as 15 per cent in 2020. Copyright: Alexandros Michailidis /

An Uneven Recovery

The economy is expected to rebound in 2021 with GDP growth of 6.25 per cent according to European Commission estimates. But the nature of the recovery is likely to be uneven across the eurozone.

“Europe is experiencing an economic shock without precedent since the Great Depression. 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 services like tourism in each economy and by each country’s financial resources,” said the EU Commission’s economy chief, Paolo Gentiloni. “Such divergence poses a threat to the single market and the euro area,” he added, which is likely to further exacerbate the already stark north-south divide in the EU that worsened a decade ago during the sovereign debt crisis. However, Gentiloni insists this divide “can be mitigated through decisive, joint European action. We must rise to this challenge.”

EU leaders have signed off on rescue measures worth at least 500 billion euros, including wage subsidies aimed at preventing mass layoffs and loans to businesses. EU President Ursula von der Leyen is under immense pressure to deliver a trillion-euro recovery fund to revive the bloc’s economy, but there is much disagreement over how the fund will function and whether “corona bonds,” a proposed joint-debt instrument popular among Southern EU states but rejected by the northern ones, will be included.

Much as it did during the sovereign debt crisis, the European Central Bank is again utilising credit and buying eurozone government bonds to keep their borrowing costs as low as possible and prevent insolvency. But their ability to bolster the euro may be limited, after a ruling by the German Constitutional Court issued an ultimatum to the ECB, saying it must show that the side effects of bond buying do not outweigh the economic benefits. The court has threatened to bar Germany’s central bank, the Bundesbank, from taking part in the stimulus programme. However this could prove to be a serious breach of European unity and potentially fracture the eurozone altogether, as it would prevent expansion of the very programmes that helped knit the different economies together. A collision course between Germany and the European Central Bank isn’t good for solidarity – or the economy.

“Two of Europe’s top courts arguing about the legality of bond-buying in the middle of a pandemic inject uncertainty into a market that doesn’t need it and does nothing to boost confidence,” noted Societe Generale strategist Kit Juckes.

The political fallout stemming from the coronavirus pandemic is difficult to predict. But the sovereign debt crisis saw the rebirth of far-right populist and euro-sceptic movements in Spain, France, and Italy, and Europe’s best hope of avoiding a repeat performance is to experience quick economic recovery – something much hoped for but far from assured.

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B. Lana Guggenheim

Lana is a freelance journalist based in New York City. She has a M.Sc. in International Conflict from the London School of Economics and Political Science. She has worked as an analyst, reporter, and editor, covering extremism, culture, economics, and democracy.

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