Coronavirus Impact: EU Economy May Shrink By 7.5% This Year, Worst Showing Since Great Depression

The European Commission said on Wednesday that the aggregate economies of the European Union member countries will shrink by 7.5% this year – the worst performance since Great Depression of the 1930s – due to the negative impact of the coronavirus pandemic and related lockdown.

(In February, prior to the spread of the virus, the European Commission projected a 1.4% increase in GDP for the EU this year.)

The Commission warned that the coronavirus pandemic represents a “major shock” for the global and EU economies, with “very severe” socio-economic consequences.

“Despite the swift and comprehensive policy response at both EU and national level, the EU economy will experience a recession of historic proportions this year,” the Commission said.

The unemployment rate in the euro area is expected to rise from 7.5% in 2019 to 9.5% in 2020 before slipping to 8.5% in 2021.

“Some member states will see more significant increases in unemployment than others,” the Commission said. “Those with a high proportion of workers on short-term contracts and those where a large proportion of the workforce depend on tourism are particularly vulnerable.”

Young people entering the workforce will also find it harder to find their first job, the Commission added.

“While the immediate fallout will be far more severe for the global economy than the [2008] financial crisis, the depth of the impact will depend on the evolution of the pandemic, our ability to safely restart economic activity and to rebound thereafter,” said Valdis Dombrovskis, executive vice president of the European Commission and former Prime Minister of Latvia.

Italy and Greece are expected to suffer the largest losses in GDP this year – at 9.5% and 9.7%, respectively. The “best” performance is expected in Poland, which will see its economy contract by 4.25%.

“The COVID-19 pandemic and the related containment measures are set to push Italy’s economy into a deep recession,” the Commission said.

Italy, which has been very hard hit by the pandemic, may have seen its real economic output plunge by as much as 18% in the first half of the year, the Commission estimated.

The Commission also warned that Italy’s public debt may reach 158.9% of GDP this year while its public deficit may jump to 11.1%

Some European nations, including Italy, Portugal, Greece, Germany and Austria, have slowly begun to relax some restrictions and gradually reopen some businesses after an extensive lockdown.

The EU’s largest economy, Germany is expected to see its economy contract by 6.5% in 2020.

“Europe is experiencing an economic shock without precedent since the Great Depression,” said Paolo Gentiloni, European Commissioner for the economy and former Prime Minister of Italy. “Both the depth of the recession and the strength of recovery will be uneven… Such divergence poses a threat to the single market and the euro area.”

Gentiloni urged European governments to take more aggressive action to bolster national economies.

The European Commission is itself planning to create a “Recovery Fund” for the region -- Gentiloni indicated the fund could be as large as $1.62 trillion.

However, the Commission expects the EU economy to bounce back in 2021 by growing at a 6.25% clip.

“Each member state's economic recovery will depend not only on the evolution of the pandemic in that country, but also on the structure of their economies and their capacity to respond with stabilizing policies,” the Commission stated. “Given the interdependence of EU economies, the dynamics of the recovery in each member state will also affect the strength of the recovery of other member states.”

Dombrovskis cautioned: “At this stage, we can only tentatively map out the scale and gravity of the coronavirus shock to our economies.”

The Commission further warned that even if the European economy rebounds in 2021, that projected growth will not compensate for huge losses incurred this year.

“The coronavirus pandemic has severely affected consumer spending, industrial output, investment, trade, capital flows and supply chains,” the Commission said. “The expected progressive easing of containment measures should set the stage for a recovery. However, the EU economy is not expected to have fully made up for this year's losses by the end of 2021. Investment will remain subdued and the labor market will not have completely recovered.”

The Commission cautioned that all of its forecasts are tinged with high uncertainty, given the unprecedented nature of the pandemic crisis.

“The forecast baseline assumes that lockdowns will be gradually lifted from May onwards,” the Commission said. “The risks surrounding this forecast are also exceptionally large and concentrated on the downside.”

As such, the body warned that a “more severe and longer lasting pandemic than currently envisaged” could cause a far larger fall in GDP than assumed.

“There is also a risk that the pandemic could trigger more drastic and permanent changes in attitudes towards global value chains and international cooperation, which would weigh on the highly open and interconnected European economy,” the Commission warned. “The pandemic could also leave permanent scars through bankruptcies and long-lasting damage to the labor market.”