Yesterday the summer economic forecasts of the European Commission (EC): the outlook is even more dire than the spring report. For the year 2020 the growth of the GDP of the Euro Zone is reduced to -8.7%. It should be noted that the decline in production this year will not be the same in all countries. Each country will emerge from the crisis in a different way and at very different rates depending on the economic policies they apply.
Thus, the Spanish economy, with a fall of 10.9% this year, has become, together with France (-10.6%) and Italy (-11.2%), the one with the worst performance among the large euro area economies. Perhaps because the three have been the strictest and longest in the confinement measures. On the other hand, countries with milder closures registered smaller drops in GDP: Germany (-6.3%), the Netherlands (-6.8%), Austria (-7.1%) and Finland (-6.3% ).
Without forgetting that Spain, France and Italy will also suffer more than other countries due to the importance of the tourism sector in all three. The EC has estimated a recovery of 7.1% for Spain by 2021. Once the bottom has been hit, it can only go up, although next year’s momentum will not be enough to recover all the lost ground.
These annual data show that during the lockdown period economic activity in the EMU suffered a monumental blow. The latest data confirm that the months of March and April were the least active in the euro area in its entire history. However, they hide another reality: recovery; that is, the historical rebound of the economy in May and June.
signs of recovery
Indeed, following hitting rock bottom in April, little by little and thanks to the lifting of blockade measures, the euro area economy has begun to recover intensely and across the board. After three months in hell, the situation is beginning to normalize and consumption and private investment are slowly beginning to take off.
Thus, retail sales in the EMU increased by 17.8% monthly in May following the tremendous falls in March and April (-10.6% and -12.1%, respectively). They also rose strongly in France, Italy and Spain, although they are still well below pre-crisis levels.
In Germany, industrial production recorded a historic rise in monthly terms in May (+7.8%), but it is still 20% below pre-crisis levels. In short, the current data shows a significant increase in activity in the months of May and June, but a return to pre-crisis levels is far off and will not be easy.
They are hopeful data, but victory cannot be claimed. The recovery will be sustained if the appropriate economic policies are applied.
In the case of Spain, it is necessary to increase access to credit from the private sector also for the self-employed. You also have to lower taxes as Germany, France and Belgium have done. You don’t have to upload them.
Indeed, the rise in VAT or personal income tax would affect consumption as it would reduce the purchasing power of citizens. If consumption is reduced, the production of the companies that generate these goods and services also decreases, and this lower production would mean higher unemployment.
On the contrary, stimulating consumption is decisive for increasing the growth of production, employment and the wage bill. In addition, in these difficult times for the Spanish economy and as a consequence of the sharp drop in economic activity, it does not seem that a tax increase is going to mean greater collection for Public Administrations, at least in the short term. Instead, you have to pay the ERTE and also the income tax refunds.
However, the problem is not only one of insufficient domestic demand, as is the case with consumption. We must continue insisting on improving the productive offer: increasing educational levels, making the labor market more flexible (instead of suppressing the Labor Reform), sustaining the pension system, carrying out a reform of the Public Administrations that makes them more efficient and, therefore, it entails a lower cost for the taxpayer. With less bureaucracy, it would be possible to reduce the high levels of public spending and debt, which will allow more financing to be given to companies and families.
With these pragmatic policies we will ensure that Spain obtains financing from the European Recovery Fund, which is being negotiated in Brussels, which will allow a new reformist impulse that places our economy in a better position to compete in the 21st century economy.
Source: Rafael Pampillon. «Europe’s rebound. July 8, 2020. Pages 20 and 21
