Eurozone at risk of collapsing

Tuesday, 2020-07-14 10:49:47
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The Euro sculpture in front of the European Central Bank (ECB) headquarters in Frankfurt, Germany. (Photo: Reuters)
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NDO – The Eurozone economy is becoming worse and worse due to the negative impacts of the COVID-19 pandemic, while deep disagreements remain between the bloc’s member states concerning the economic recovery plan.

Analysts are concerned that the aforementioned situation could break the Eurozone, causing the bloc to fall apart.

In an interview with German daily Die Welt, European Commissioner for Economy Paolo Gentiloni stated that the recession caused by the disease in the Eurozone is getting worse. Accordingly, Eurozone economies are on the brink of collapse due to gross domestic product (GDP) shrinking by 10-11% in some countries, including Italy, France and Spain. Meanwhile, the countries in the European Union (EU) have yet to agree on a general economic revival plan for the whole bloc.

Before Gentiloni issued the warning, Eurozone economies had fallen into serious difficulties and faced the risk of a deep recession. Amidst the global outbreak of COVID-19 in the first half of the year, countries in the Eurozone and the remaining major partners in the EU and the UK have imposed coronavirus lockdown rules. Regardless of their efficiency in helping to contain the pandemic, these measures have caused many businesses to suffer heavily as they have been forced to temporarily cease their operations. Meanwhile, cultural and social life has also become stagnant. It is predicted that the GDP of this region will decline at an “unprecedented speed” in Q2 2020.

Another worrying problem is that debt is “besieging” many Eurozone economies. According to the International Monetary Fund (IMF), public debt of France and Spain will exceed 100% of GDP to reach 125.7% in 2020 and 123.8% in 2021 for France, and 123.8% and 124.1% for Spain. The European Commission (EC) and IMF forecasts show that the Eurozone’s economic prospects are still overshadowed by dark colours. The latest EC prediction said the Eurozone economy will decline by 8.7% in 2020 before growing by 6.1% in 2021. In its newly released World Economic Outlook 2020 report, the IMF stated that the Eurozone economy will drop by 10.2% this year and is expected to recover in 2021 with a growth rate of 6%.

The EU’s largest economy, Germany, will shrink by 7.8% this year and then increase by 5.4% in 2021. The French economy will also decrease by 12.5% in 2020 before attaining a growth rate of 7.3% next year.

Amidst economic difficulties, EU member nations as a whole and those in the Eurozone in particular have not yet been able to agree on a common stimulus plan to create an “energy tonic” for the economy, which has made the regional economic outlook gloomier still. Although the EC proposed a COVID-19 recovery fund, the “quartet” of Austria, Denmark, the Netherlands and Sweden rejected the proposal. Over the weekend, President of the European Council Charles Michel reiterated the proposal to set up a recovery fund worth EUR750 billion to support the pandemic-hit economies. Two-thirds of the value will be in the form of grants and a third in the form of loans, together with a reserve fund of EUR5 billion to deal with unforeseen consequences related to Brexit for member countries. Speaking to the media, Michel emphasised that COVID-19 is posing a historic challenge to Europe. The EU is gradually coming out of a serious health crisis and now needs to shift its focus to mitigating socio-economic losses. It is expected that the aforementioned proposal will be discussed by EU leaders during a summit of the bloc set for July 17-18.

Ahead of the abovementioned meeting, German Chancellor Angela Merkel has urged the EU leaders to quickly reach a consensus on the recovery fund, while calling for Europe’s joint determination to overcome the most difficult situation in its history. Meanwhile, European Commissioner for Economy Paolo Gentiloni emphasised that EU countries need to agree on an economic recovery plan as soon as possible in order to build trust and contribute to making a faster recovery.

Over the past 10 years, the EU in general and the Eurozone in particular have gone through many turbulences and crises. In difficult moments, nations in the region have worked together to remove differences and help the “EU ship” successfully sail through the storms. At present, the COVID-19 has triggered the risk of Eurozone disintegration, and now is the time for member countries of the “big EU family” to unite in overcoming this vital challenge.