Of all the damage caused by Covid-19 in 2020, one of the most significant impacts has been on the economy which has suffered its largest setback since the Great Depression. Compared to the global economy, the member countries of the euro area had suffered a bigger blow in 2020. All European countries were suffering serious production losses as a result of the Covid-19 crisis, including countries in the south countries have suffered even more than some northern countries. The uneven deterioration can be attributed to the severity of the foreclosure measures, the share of tourism in the economy and the quality of governance. From the graph below, we can observe that the most marked declines since the start of the time series in 1995 were observed in the second quarter of 2020 (-11.5% in the euro area and -11.1% in EU).

To counter the above chaos in the area, EU leaders agreed on four priority areas namely limiting the spread of the virus, securing the supply of medical equipment, promoting research for treatments / vaccines and finally supporting employment, businesses and the economy. On the fourth priority, EU leaders approved a € 540 billion package of three safety nets for workers, businesses and member states in April 2020. They also took action to redirect EU funds to help Member States and increase flexibility in the use of structural funds which have allowed Member States to transfer money between different funds and regions to meet their mitigation needs social and economic damage from the pandemic. Not only that, member countries have been given the freedom to request up to 100% funding from the EU budget to deal with the impact of Covid-19. In addition, EU state aid rules have been relaxed so that governments can provide liquidity to the economy.

In addition to the above measures, EU leaders agreed on a Recovery and Resilience Fund (FRF) that would help all member countries of EU countries, especially those that have been the hardest hit. The proposal was presented by the European Commission in May 2020 and in July 2020 EU leaders agreed on a € 750 billion stimulus package. With 540 billion euros in funds, the overall EU recovery plan amounts to 2,364.3 billion euros. Thanks to these measures, the EU economy rebounded in the third quarter of 2020.

But fate had something else in mind. The resurgence of coronavirus infections led to a further decline in economic activity in the last quarter of 2020, wreaking havoc on the common man, the economy and the markets. As the graph shows, the European Union has recorded a higher number of deaths from Covid-19 per million people than the global trend. In fact, the cases were much higher than the cases reported in China, for example. On the contrary, in terms of vaccinations, the EU is lagging behind the United States. For this reason, the seasonally adjusted GDP for the 1st quarter of 2021 decreased by 0.3% in the euro area and by 0.1% in the EU compared to the previous quarter.

To control the economic damage, the EU decided to release its first stimulus funds amid growing fears from Delta in July 2021. Member countries like Austria, Belgium, Denmark, France, Germany, Greece, Italy, Latvia, Luxembourg, Portugal, Slovakia and Spain have finally received the green signal to use the stimulus and resilience funds to boost their economies after the fallout from Covid-19 . As a result, we can expect some improvement in the situation which should allow the economy to recover again. According to European economic forecasts for winter 2021, real gross domestic product (GDP) is now expected to reach pre-crisis levels by mid-2022. However, the only obstacle to growth would be the ongoing pandemic and the speed of vaccine deployment. The latter being the most important because the vaccination process and vaccine effectiveness will decide the course of subsequent mutations in the virus and government decisions on how to manage health risks.

The repercussions of the same can also be seen in European markets and the currency which has been trading on a roller coaster mode since the start of 2020. The onset of Covid-19 had pushed the euro currency to a low of 1 .0690 in April 2020. Subsequently, the common currency recovered sharply thanks to various measures adopted by the EU which helped the euro area economy. However, once again the currency is heading south due to fears surrounding the Delta virus. It is possible that EUR / USD and EUR / INR will trade with a negative bias towards the 1.1650 and 86.50 levels in the short term.

To conclude, the after-effects of the second wave and the possible appearance of the Delta virus could create obstacles in the way of growth of the euro zone. Given the stimulus packages undertaken, even if the outlook for the EU improves, returning to pre-crisis levels of economic activity would still mean slow growth for the EU economy. This downtrend in the economy will also influence the euro’s trend, keeping it down for some time yet.

(Author is Research Analyst – Currency, Angel Broking Ltd. Opinions are his own)


Leave a Reply

Your email address will not be published.