Bloc forecast to rebound more slowly than other economies due in part to smaller fiscal stimulus
Eurozone countries should increase government spending by an extra 3 per cent of gross domestic product over the next year to mitigate the economic impact of the coronavirus pandemic, the IMF said on Wednesday. The 19-country bloc is forecast to recover more slowly than its main trading partners, the IMF has warned, held back by vaccination rollout delays, extended coronavirus lockdowns and a smaller fiscal stimulus than the US is implementing.
Advanced European economies are expected to cut their extra fiscal support from 7.5 per cent of GDP in 2020 to about 6.5 per cent this year, the IMF said. A further increase in public spending would boost the bloc’s growth by 2 per cent and reduce the permanent loss of jobs, investment and output due to the crisis, according to the fund.
“The faster the recovery, the less scarring people and businesses will suffer from unemployment, lost human capital and lower investment and research and development,” the IMF said in its latest European regional economic outlook. In particular, European governments should spend more on “additional transfers targeted at households in need, hiring subsidies to reintegrate the unemployed faster, temporary investment tax credits to bring forward investment and equity support schemes for viable firms in need of capital”, the fund recommended.
The IMF recently trimmed its growth forecast for the eurozone this year to 4.5 per cent and estimates that it faces a long-term output loss relative to the pre-Covid-19 trend of about 1.5 per cent of GDP by 2025. “As monetary policy — close to the effective lower bound in several economies — becomes less effective in boosting output, fiscal policy needs to play an increasingly larger role,” the IMF said.
“Fiscal measures to stimulate investment and to facilitate job creation and reallocation would speed up the recovery.” Christine Lagarde, president of the European Central Bank and former head of the IMF, compared the eurozone economy to a patient coming out of intensive care but still leaning on two crutches. “You don’t want to remove either crutch, the fiscal or the monetary, until the patient can actually walk fine, and to do that means support well into the recovery,” she said on Wednesday.
The $1.9tn fiscal programme launched by the US government is expected to provide a 0.3 percentage-point boost to eurozone GDP and a 0.15 percentage-point lift to inflation by 2023, Lagarde added.
Several European countries are ramping up their spending plans. The German government last month approved a €60bn supplementary budget and the Dutch cabinet is discussing extra expenditure. Mario Draghi, Italy’s prime minister and Lagarde’s predecessor at the ECB, is preparing a new package of stimulus measures worth up to €40bn — about 2.5 per cent of GDP — which could push Italy’s budget deficit this year above 10 per cent of GDP.
That would be the first time the country’s deficit has hit double digits since the early 1990s. Since taking office two months ago Draghi has argued that his country and others in Europe must provide significant support to their economies to reduce the impact of pandemic lockdowns. Draghi is expected to present his plan to Italy’s two parliamentary chambers for approval in the final week of April. EU governments are this month due to submit plans to Brussels for how they plan to spend their share of the bloc’s €750bn NextGenerationEU recovery fund.
However, the money is not due to start being distributed before June, while several governments are yet to approve the plan and it faces a legal challenge in Germany. Luis de Guindos, vice-president of the ECB, told MEPs on Wednesday: “If we want a timely recovery in Europe, we have to avoid any cliff effects from the premature scaling back of these [stimulus] policies. It is therefore of the utmost importance that the NextGenerationEU plan becomes operational without delay.”