Coronavirus Projected to Send Eurozone Into Steep Recession

Restrictions in Madrid to contain the pandemic have weighed heavily on the Spanish economy. PHOTO: MANU FERNANDEZ/ASSOCIATED PRESS

By Laurence Norman and Maria Martinez 

BRUSSELS—The eurozone economy will suffer “a recession of historic proportions this year” because of the coronavirus pandemic, European Union officials predicted, with soaring national debts entrenching economic divisions between countries that could threaten the currency bloc’s stability.

The European Commission’s forecasts follow recent data showing that Europe is already suffering deep damage from the global health emergency. The hit is particularly hard in its southern members, whose economies have long lagged behind wealthier northern nations such as Germany and where the public-health crisis has been even more acute.

The eurozone economy is projected to contract 7.7% this year and grow 6.3% in 2021, the commission said, which would still leave it some 3% below the commission’s previous forecast level by the end of next year.

“It is now quite clear that the EU has entered the deepest economic recession in its history,” said Paolo Gentiloni, the European economy commissioner. He predicted a recovery will start in the second half of this year.

While all EU economies are expected to contract this year, Wednesday’s forecasts underline the divergent impact the pandemic could have across the region, with Greece, Spain and Italy projected to contract by close to 10% in 2020 and unemployment rising sharply in Spain in particular.

 The commission forecasts that by this year’s end, seven eurozone economies will have debts exceeding 100% of their gross domestic product, with Greece’s ratio near 200% and Italy’s rising to 159% from 135%. That of the eurozone as a whole is expected to increase above 100%.

The projections reinforce a growing consensus that the recent plunge in world-wide economic activity will be followed by a slow, halting and uneven recovery. They underscore the delicate balancing act facing national policy makers, many of whom are now trying to reopen their economies while protecting people against new waves of infection.

Lockdowns to fight the virus strangled many eurozone economies, particularly in Italy, which was the first country outside Asia to be hit hard by the pandemic, and in Spain. In contrast, Germany, the eurozone’s economic powerhouse, kept most of its factories open over recent weeks and on Wednesday accelerated its exit from lockdown.

Now, as governments move to restart frozen economies, richer northern countries stand positioned to pull ahead while battered and indebted southern ones struggle to recover.

Exacerbating the divergence is the prospect of travel restrictions extending through summer, potentially denying countries along the Mediterranean Sea the annual flood of tourists from Europe’s more industrial north. Greece and parts of Italy, France and Spain are deeply dependent on tourism.

The commission’s forecasts come as the bloc is locked in a protracted debate over how to kick-start a recovery once the immediate economic crisis is over. Italy, Spain and others have pushed for common debt issuance and large-scale economic transfers from wealthier, northern economies to struggling mainly southern countries to prevent years of stagnation.

Work on a recovery plan is moving slowly. Legal and political constraints are making wealthier northern countries reluctant to commit vast amounts of resources.

Echoing warnings from the European Central Bank, the commission said that failure to mount a common fiscal response could cause permanent damage.

General-government debt as a percentage of GDP, 2008–21*Source: European Commission*2019 is an estimate; 2020 and 2021 are forecasts.

A “strong European recovery plan needs to complement national action,” the report said. Otherwise existing economic and social differences inside the eurozone “could ultimately threaten stability.”

The commission warned of “extraordinarily large” downside risks from longer-than-expected lockdowns to contain the virus, protracted disruption to global supply chains, and the imposition of tariffs by the U.K. and the EU if trade talks fail. A surge in infections, triggering a second lockdown, would knock another 3 percentage points off the region’s GDP, the European Commission warned.

Eurozone inflation is expected to remain contained, with the consumer-price index rising 0.2% this year and 1.1% next year. The unemployment rate is forecast to rise to 9.6% this year from 7.5% in 2019. Budget deficits are expected to rise above 10% in Italy and Spain and to 9.9% in France this year.

Mr. Gentiloni said the region’s short-time work programs, wage subsidies and liquidity provision for companies mean the fall in employment should be “more moderate than in other parts of the world, if we look for example at the United States.”.

Figures released in recent days showed a record drop in the currency area’s GDP during the first three months of the year. Surveys of businesses indicate the decline accelerated in April, with data firm IHS Markit’s purchasing managers index plummeting to 13.6 from 29.7 in March, reaching its lowest-ever level.

Figures released Wednesday showed new orders received by German factories in March were down 15.6% from the previous month, the largest drop since the series began in 1991.

Economists at the ECB expect the eurozone’s economy to shrink between 5% and 12% this year.