COVID-19: How the euro area recession will impact you
The euro area recession precipitated by the COVID-19 pandemic will be much greater than the financial crises of the past two decades and will take time to recover from, experts have announced this week.
The eurozone is expected to be among the worst affected by the pandemic with the IMF forecasting in late June that growth will shrink by 10.2 per cent this year. It projected that global growth meanwhile will fall by 4.9 per cent.
In layman’s term, this means that “average income will fall by 10.2 per cent” in countries that use the single currency, Antonio Fatas, professor of economics at the INSEAD business school, told Dailyrater.
“That is a massive fall in income that is larger than during the global financial crisis,” he added.
The EU Commission’s forecast is a bit more optimistic than the IMF. It predicts that the euro area economy will contract by 8.7 per cent this year.
Meanwhile, the OECD, expects the eurozone’s economy to shrink by 9.1 per cent this year if countries manage to tame the pandemic and by as much as 11.5 per cent in the event of a resurgence.
In contrast, the euro area contracted by 5.5 per cent in 2009 as it dealt with the financial crisis.
‘No obvious culprit’
The bad news is that this recession is trickier to handle for policymakers than in 2008.
“In the previous one, the shock came from the financial system, initially in the US, but also in the EU,” Zsolt Darvas, a senior fellow at the Brussels-based Bruegel think tank, told Dailyrater.
“This one is completely different because there is no such weaknesses in any economic sector” and is instead “a mixture of supply and demand-side shocks without an obvious culprit,” he added.
The good news, however, is that “this time governments reacted much earlier and also much more forcefully”, Darvas went on.
According to the IMF, policymakers across the world have so far injected more than $10 trillion into the economy to prevent bankruptcies and safeguard jobs.
Bruegel estimates that France has already unlocked over €660 billion to prop up its economy, while Italy and Germany have provided €870 billion and €1.6 trillion respectively in fiscal support.
Still, the impact is being felt.
The number of people employed in the euro area decreased by 0.2 per cent in the first quarter of this year compared to the previous quarter. Eurostat noted that it was “the first decline in the time series since the second quarter of 2013”.
Unemployment is expected to increase further as lockdowns to prevent the spread of the deadly virus were only introduced in Europe from mid-March — so towards the end of the first quarter — and as governments start to wean off their support to companies.
Social distancing rules and uncertainty may also lead people to spend less and save more, while companies might put off investment which, in turn, is likely to impact income.
“Companies might reduce wages, even if they don’t lay off people,” Darvas explained.
According to the European Commission, seven years after the 2008 financial crisis, GDP per capita — which helps gauge a country’s standard of living — across the EU had still not recovered its pre-crisis level.
A two-speed recovery
And just like the previous crisis, the recovery across the euro area is unlikely to be uniform with southern countries expected to suffer more and for longer.
“Stronger countries like Germany and the Netherlands will recover much sooner than countries with weaker fundamentals like Italy, Spain, And Greece,” Darvas explained.
He forecasts that, provided there is no major second wave, northern and western countries should be back on solid economic ground within two to three years.
“But in southern European countries I expect a much more protracted, much longer recovery,” he said.
“The reason is that these countries had much more structural problems. Also these countries can’t support their economies and companies to the same extent,” he emphasised, projecting that “more companies will go bankrupt in Italy than in Germany”.
“I’m afraid the recovery in these countries will take a couple of more years than in northern Europe,” he went on.
However, this crisis may, in the end, lead to greater solidarity among member states.
The European debt crisis of 2012 exposed a deep rift between northern and southern member states with northern countries imposing strict conditions to bail out their southern neighbours, which they accused of not being fiscally responsible enough.
“The plan discussed by the Eurogroup is the first time we see the possibility of European fiscal policy used to fight a recession. Yes, the fact that this crisis is not caused by the behaviour of any particular country makes a difference. Solidarity is easier in this type of events,” Fatas said.