• In its latest report, MAPFRE Economics forecast a sharp contraction in economic activity in the eurozone

  • Fiscal policy is still awaiting a joint funding mechanism

Many commentators believe that the coronavirus crisis is the eurozone’s greatest challenge since it was introduced. In this regard, in its latest Outlook Report MAPFRE Economics expects “the region’s GDP to shrink by at least 5.1 percent – an estimate that will depend on the duration and depth of the contraction in activity, the effectiveness of health and economic measures and, most notably, financing commitments and could even reach a 12.4 percent drop in GDP in 2020.”

At the beginning of March, the European Central Bank announced an unprecedented package of measures to avoid liquidity and solvency problems in the system, and this seems to be the only viable element of joint aid in the short-term.

However, the debate revolves around whether the measures will be enough to deal with the unknown risks that have yet to emerge and may require a global response. According to the report, the discussion focuses on the feasibility, form and conditions of possible pan-European bailout mechanisms, as well as the economic, political and structural consequences for the future of the European Union, depending on the measures taken.

Why is it so difficult to reach a consensus?

The debate about the conditionality of the bailout fund and the creation of a joint bailout fund has split the parties. Southern European countries, led by Italy, refuse to resort to a rescue fund tied to future reforms. Central European countries, meanwhile, do not accept a joint reconstruction fund in which other countries’ debts are guaranteed. The problem with this stance, MAPFRE Economics concludes, is that it “seems to delegitimize the spirit of the European Union and is likely to be used in demagogic arguments on compatibility with Union membership.”

In this regard, the European Council has already made progress on a proposal for the bailout fund, which will form part of the revised draft of the multiannual budget for the next period (2021-2027) and which will be added to the 540 billion euros in liquidity for Member States already approved by the Eurogroup.

The full Outlook Report is available here.