European Union Now Sees a Risk of Recession as Deep as 2009

European Union Now Sees a Risk of Recession as Deep as 2009

15:25 - EU Commission revises again expectations of 2020 contraction. EU’s executive arm proposes suspension of budget discipline.

The European Union’s executive arm said this year’s recession may be much worse than previously anticipated, proposing a suspension of the bloc’s draconian fiscal rules to cushion the fallout from a deadly viral outbreak that has brought its economy to a halt.

“Assuming an extension of the health crisis up to the beginning of June or beyond, the fall in economic activity in 2020 could be comparable to the contraction of 2009, the worst year of the Economic and Financial Crisis,” the European Commission said in a statement on Friday.

The Commission’s signaled that its baseline assumption from only a week ago about a 1% contraction in this year’s economic output is probably optimistic. “Developments since” point to a more adverse trajectory, it said.

The grim outlook is in line with the most recent projections from the European Central Bank. Its president, Christine Lagarde, told EU leaders earlier this week that euro-area output will shrink by 2% this year if a virus-induced lockdown in the continent lasts for one month, and by 5% if it stays for three months, two people familiar with the matter said.

The prospect of a severe and potentially unprecedented downturn prompted the ECB to unleash an extra emergency bond-buying program worth 750 billion euros ($800 billion) to calm a worsening financial crisis and protect the economy through the coronavirus epidemic.

On top of the monetary stimulus, EU governments have pledged a coordinated fiscal response to help businesses and households stay afloat while scientists search for a vaccine to the deadly illness. The Commission proposed Friday that member states invoke a crisis clause that waives their obligation to abide by strict budget deficit limits.

“We have already made clear that governments can spend what they need to tackle this emergency,” EU’s economy chief Paolo Gentiloni said in a statement. “These are not normal times and there can be no business as usual.”

EU finance ministers are due to discuss, and likely approve, the Commission’s proposals over a video conference on Monday. It will be the first time the bloc triggers the so-called “general escape clause,” to suspend fiscal prudence requirements.

— With assistance by Zoe Schneeweiss

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