Is the EU's economic future frozen over after COVID-19?
Featured Image by @a___artt

2020 has seen COVID-19 infect more than 13 million people across the European Union (EU) alone. This has had consequences not only in public health but also in the economy of the whole EU, mostly due to the national and regional lockdowns across the union since March.

The EU economy, as a whole,  suffered severely in the first six months and improved slightly in the second half of the year as countries came out of Lockdown.  Compared to the year before, there was a 6.2% decrease in production across the EU in August 2020 from August 2019.

The EU’s biggest fall in GDP

Our 2020 reality is far from the European Commission’s 2019 forecast which anticipated an increase in economic growth of 1,4% in Gross Domestic Product (GDP). 

Currently, the Commission has projected that the economy will contract by 7.8% which echoes the estimates made by the OECD (-7.9%) and the IMF (-8.3%). This decline in economic growth is set to recover in the next two years with a predicted growth of 4,1% in 2021 and 3% in 2022 according to European Commission projections.

“We will work together to chart the course to recovery, using every tool at our disposal,” Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People, said.

“I now call again on the European Parliament and Council to wrap up negotiations quickly for money to start flowing in 2021 so that we can invest, reform and rebuild together.”

As Mr Dombrovskis said, the EU is playing a big part in the recovery through the project NextGeneratioNEU. It is an economic recovery package of €750 million which comes from a part of the EU budget for 2021-2027. This package is yet to be approved because of Hungary and Poland’s veto. “We cannot support the plan in its present form to tie rule of law criteria to budget decisions,” said Zoltan Kovacs, a spokesman for Prime Minister Viktor Orban. However, Ursula von der Leyen, President of the European Commission, is threatening to pass the recovery fund without them.

This economic freefall has not only affected the EU, but also the rest of the world. According to an IMF forecast, India and Mexico have seen some of the biggest decreases in their GDPs, with a decrease of 10.3% and 9% respectively. It is predicted that other global economies will contract less, including the United States, Australia and Brazil by approximately 4%. Remarkably, China’s GDP is not expected to decrease at all but will actually see an increase in 1.9%, meaning that China would only experience a decrease of just under 4% from last year.  It is predicted that all of these economies will recover and will return to a positive growth trend by the end of 2021.

Real GDP infographic on the international percentage changes following COVID-19
Infographic made by the author. Data source: the International Monetary Fund’s World Economic Outlook

Some countries will suffer more than others

In the same way, Coronavirus hasn’t affected all countries’ equally, the EU’s economies have suffered disproportionally as well. Comparing the data from a wider perspective across the EU, we can see that the southern countries like Spain or Italy with a decrease in their GDP of 12,4% and 9,9% respectively have suffered more economically. While on the other hand, the northern countries have suffered less like Sweden or Poland with a decrease in their GDP of 3.4% and 3.6% respectively.

Infographic on EU countries' GDPs follow COVID-19
Infographic made by the author. Data source: European Commission’s Autumn 2020 Economic Forecast

Unemployment is also on the rise

Across the EU, a lot of businesses have had to close in the last year or have seen their workforce reduced which has left behind a lot of people who are now unemployed. The highest unemployment rate in the EU of the last 20 years was recorded in 2013 at 11.4%. Since then, the EU has been working to reduce unemployment, and in 2019, it reported unemployment had dropped to 6.7%. Unfortunately,  the European Commission’s forecast has predicted an increase to 7.7% in 2020 and 8.6% in 2021. Unemployment will likely drop to 8% by 2022 following the impact of Coronavirus. The most vulnerable countries are the ones who rely on seasonal employment including on industries like agriculture and tourism, which have a large proportion of workers based on short-term contracts who depend on the seasonal influx of tourists in the summer months.

EU unemployment rate
Infographic made by the author. Data source: European Commission’s Autumn 2020 Economic Forecast

Tourism is the most damaged sector

The World Tourism Organization estimated that Europe has seen a decline in arrivals in the first 8 months of the year by 68%. Typically, Southern Europe as a region hosts more tourists at 41% which is predominately made up of ‘sun and beach’ tourism. Countries like Italy, Greece or Spain are the ones that will suffer the consequences not only in the airlines and hotel sectors but also in the decline of travel agencies, restaurants, and museums. To reactivate these sectors, some countries have allowed certain trips to take place like the “Back to Canary Island, Back to Spain” in an attempt to support the sector in the next few months.

Other economic consequences of the pandemic

The pandemic has made the EU’s members take exceptional policy actions to help support and protect their economies and their citizens through a rise in social spending. Social spending had to rise while tax revenues fell and has consequently led to a rapid increase in government deficits across the EU. 

In 2019, the EU’s overall deficit was 0.5% but the EU has forecasted an increase of  8.4% in 2020,  6,1% in 2021 and to 4,5% in 2022. In the last 3 years (2017-2019) the inflation has stayed at an average of 1.6%, which is a normal level since economists recommend that inflation should be between 1.5% and 2% for sustainable economic growth. However, this year the inflation rate has lowered to 0.7% due to the pandemic. Nevertheless, the forecast predicts that inflation will go back to normal levels in 2021 at 1.3% and then up to 1.5% in 2022.

The difficulties of making predictions in an unstable time

All these projections have been made in an unstable climate when it is difficult to forecast what will happen. Right now, Europe is in the midst of its second wave where each member state is trying to do its best to protect its citizens while at the same time, stimulating their economy. 

It is also worth mentioning that we live in a globalized society where a shift in geopolitics can seriously modify the course of events. Covid-19 leaves uncertainty but other events like how smooth the transition of power to President-elect Joe Biden is in January, the outcome of the US-China trade agreement, social unrest in Latin America and the political instability in Peru and Colombia, or the tension in the Middle East such as the recent Iran-Israel confrontation.

The announcement of Moderna and Pfizer and BioNTech vaccines have given hope and the EU has already announced an initial purchase of 100 million doses of the 95% effective Pfizer and BioNTech vaccine. They are planning to start the distribution at the beginning of 2021. With all these announcements some experts, including the BioNTech co-founder Ugur Sahin, has suggested there will be a significant change over summer and we will go back to normal by next winter. But aside from all these uncertain moments, the announcements of new COVID-19 vaccines and a new US president means we can expect 2021 to be a little less ambiguous.