EU Heading For Worst Recession in History. What Does That Mean For the U.S.?

The coronavirus crisis in Europe is beginning to ease somewhat as even the hardest-hit nations are seeing improvements in new infections and deaths. Italy had the fewest deaths in two months yesterday and German Chancellor Angela Merkel announced that schools and restaurants would reopen in a few days.

But the economic wreckage caused by the lockdown will be severe and will fall unevenly on EU nations.

Overall, the EU is expecting the economy to contract by 7.75 percent. But Greece is expecting a 9 percent drop in economic activity and other southern tier EU nations are looking at a contraction just as bad. The situation highlights the difficulty of the EU to design an economic relief package for the entire bloc. Eurozone finance ministers are hoping to have a deal in place by Friday to establish credit lines for each country, but the going has been tough.

The credit line will be roughly 2 percent of each nation’s GDP with no strings attached. Repayment terms will be easy and the credit window will be open at least for two years. But it may not be enough for some countries whose economies were already tanking when the pandemic hit.

As it is, the EU is in for a rough ride.

Financial Times:

It could get worse The commission’s 7.75 per cent growth dive for the eurozone (7.4 per cent in the EU as a whole) is based on the most “benign” outcome where Europe’s economies gradually lift confinement measures in the coming weeks and the virus does not return with a vengeance. In case of setbacks and rising infection rates, the commission has modelled two far more severe scenarios: one where output falls by as much as 15.5 per cent in 2020 if lockdowns are extended further for months; and another 10 per cent of GDP decline if a second wave of the virus hits during the winter.

This forecast is slightly better than the Congressional Budget Office’s forecast for the United States, which is grim.

• Inflation-adjusted gross domestic product (real GDP) is expected to decline by about 12 percent during the second quarter, equivalent to a decline at an annual rate of 40 percent for that quarter.
• The unemployment rate is expected to average close to 14 percent during the second quarter.
• Interest rates on 3-month Treasury bills and 10-year Treasury notes are expected to average 0.1 percent and 0.6 percent, respectively, during that quarter.

But the CBO is projecting a rebound in the third quarter, with growth of 5.4 percent and fourth-quarter GDP up 2.5 percent. Considering that the lockdown may extend into the third quarter in some big states, the CBO’s estimate sounds a bit optimistic. But there’s a massive pent-up demand out there and that’s what the CBO is basing its projections on.

The U.S. recovery may be slowed, however, by Europe lagging behind in output. The $1.5 trillion in back and forth trade between the two economic powerhouses will obviously be affected. But the U.S. economy is better equipped to handle a fall off in imports and exports from Europe than the EU.

Europe’s Achilles heel is the wide disparity between the rich north and poor south. In effect, Germany and France have been subsidizing the creation of debt in Greece, Italy, and Spain for the last decade and now that it’s crunch time, the southern EU nations are unable to finance their recoveries without massive help. It’s a strain on the alliance that is only going to grow as the pandemic winds down and the economic wreckage is cleared away.