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Summary
- The European Commission forecasts that the combined GDP of 27 European Union countries will shrink by 8.3 per cent in the year 2020
- The UK economy projected to slow down by 9.75 per cent in 2020
- EU leaders will meet in Brussels in the third week of July 2020 to discuss a €750 billion recovery plan
- The plan aims to provide direct grants to hardest hit companies in the EU
In a recent report that indicates the dire state of economic affairs in the eurozone economies, the European Commission (EC) has said that the continent faces prospects of a much deeper recession than was previously anticipated. This report comes just ten days before a proposed European Union Summit, which will take place during the third week of July 2020 in Brussels. The summit will discuss a €750 billion recovery plan, for 27 EU member nations.
The EC report predicts that the combined GDP of EU member nations will shrink by 8.3 per cent during 2020. It will grow moderately by 5.8 per cent in 2021. The report also forecasted the UK economy to shrink by 9.75 per cent in 2020. Two months back in May 2020, the Commission was more optimistic. It had projected the EU economy to shrink at a lower rate of 7.4 per cent in 2020 and grow by a higher rate of 6.1 per cent in 2021. So now the economic impact of the corona crisis is seen to be worse than before.
This recovery plan is being put forward following a proposal by France and Germany, to borrow on behalf of EU and provide grants to hardest hit European countries. This Franco-German proposal has received mixed response from the Union members. However, given the uncertainty regarding recovery from the corona pandemic, the proposal remains crucial.
The current state of the Eurozone economies
The largest and the economically most advanced countries in the European continent are the hardest hit by the pandemic. The countries which are expected to suffer the most in 2020 are Italy (expected to shrink by 11.2 per cent), Spain (-10.9 per cent), France (-10.6 per cent), the Netherlands (-6.8 per cent), Germany (-6.3 per cent), and Poland (-4.6 per cent).
Most of these countries which went into lockdown in the month of March, have started to gradually re-open with lowering of corona infection rates. However, things are not yet normal, as restrictions continue on travel and social distancing across factories, and work places. There are also restrictions on cross-border movement of people and vehicles, air travel between member countries, and sporting & cultural events, that are delaying economic recovery.
Concerns have emerged over recent outbreaks across certain areas in Spain and Portugal. Such areas have seen a re-imposition of restrictions to prevent the further spread of infections.
The Franco-German proposal
France and Germany had put forward a plan for EC to take on a €500 billion loan from capital markets and distribute it as grants to the worst hit EU member countries as grant to fight the coronavirus pandemic. The funds will be directly given to businesses from the Union members, and will not only protect them from closing down but will also save jobs across the continent which is struggling with high unemployment rates.
This plan has become the forerunner of a larger proposal that the European Union is now perusing, with an increased fund size of €750 billion. Both France and Germany are often regarded as EU growth engines. During the 2008 financial crisis as well these were the two countries who initiated the bail out of financial institutions in the Union as they had lost significant amount of capital. The Union slowly retired-off this debt over several years by making due provisions in its yearly budgets.
The current size of the 2012-2027 planned EU budget is close to €1 trillion. This recovery proposal will be over and above that. Member nations have to promise that they would follow strict economic reforms agenda to be eligible for the proposed grant.
Opposition to the grant-based proposal
There are, however, other countries who do not believe that a grant-based approach would be the right approach during these uncertain and testing pandemic times. Austria, Denmark, Netherlands, and Sweden (who are often referred as the frugal four) have objected to the proposal in the present form and have threatened to block it. They are of the opinion that the funds should be given as a loan, albeit at a lower rate of interest which will add responsibility to the borrowers. They fear that countries who are not as financially disciplined as some of the other larger countries, might not be as prudent in their spending behaviour as desired.
Therefore, the discussions at Brussels could try to arrive at a compromise between all the member countries so that the funds could be made available to the needy firms at the earliest. In the meantime, the Union has also drawn out plans to borrow as much as €11.5 billion for the 2020 budget to fill in the spending gaps that could arise when the ongoing stimulus packages expires. If the plan gets approved, it will see the EU debts rising to unprecedented levels which take up to a decade to be repaid. However, there seems to be no choice at the moment.
Conclusion
It is very important that the EU member countries agree to a recovery plan as soon as possible with the risk of business failures and job losses increasing by the day. Whether the funds are disbursed in the form of grants, in the form of soft loans or a combination of both, their timely disbursal will help the EU member nations from sinking deeper into the ongoing economic recession. On the pandemic front, the uncertainty might continue for some more time and even if an effective vaccine is found by the year-end, it may take yet another year for things to get back to normal.
