EU faces a challenging road to recovery

There are some tricky times ahead for the European Union in the next few months. It appears that very limited progress is being made on the Brexit negotiations before the United Kingdom leaves the EU at the end of the year; and to compound the challenge the bloc is far from being at one as to how the Covid-19 recovery plan for Europe should be financed. All countries in the EU, in common with most others globally, have been badly hit economically by the fallout from the pandemic but some much worse than others. The European Commission has warned of a 'deep recession' this year in its Summer 2020 Economic Forecast. No real surprises there; but some economies within the EU are doing worse than others. Some such as France and Spain are in serious difficulties with a projected annual decline in GDP of over 10% whilst others, particularly Germany and Poland, are performing much better though both still foresee big annual drops in GDP.

Just how the EU should recover its overall economic stability in the aftermath of the pandemic is causing a great deal of concern. A clear North:South divide is emerging in the discussions. Sweden, Finland, Denmark and the Netherlands – the so-called 'frugal four' alliance - are pushing for tight conditions around the sizeable recovery funds that are being talked about. They want to see already struggling economies who were not performing well in relative terms before the pandemic to use such funds to improve their competitive performance. However the 'southern' EU states see this as being politically unacceptable. Opposition is being led by Greece which has already faced huge financial challenges in the past five years. They had started to see the very first shoots of recovery – although there was still a very long way to go – before Covid appeared. However tourism was a key part of their recovery plans. In 2019, Greece received 33 million visitors from abroad. This year of course only a fraction of that number are expected to arrive, helping to generate a GDP drop of around 10%. It is an economic disaster for Greece which was already in a parlous position before the event, and they would like to see some EU-wide solidarity in helping them out of the new hole they now find themselves in.

With the imminent departure of the UK from the EU, the Dutch Prime Minister Mark Rutte seems to have picked up the mantle of 'Mr Awkward'. With a week to go to finalise a €750 billion recovery package Mr Rutte is being frantically wooed to be more flexible. He can expect visits from senior government officials in Spain, Portugal and Italy in the next few days whilst journeying himself to Berlin to meet with Angela Merkel. They all want him to change his position on one thing; they would like the large recovery package to be based around grants whilst Mr Rutte and the other hawkish members of his unofficial internal EU alliance would like them to be in the form of loans which must be paid back and must also be linked to economic reforms.

His opponents argue that this is no time to be mixing issues; economic reform can wait, now is the time for plain and simple bailout measures to help the struggling nations get over the hump in the road. They will have a challenge on their hands; one Dutch official when asked what they thought of the scheme on the table was quoted in the Financial Times as saying 'we simply hate it'. Ms Merkel has urged that compromises should be urgently reached given the seriousness of the situation; and perhaps it is fortunate that Germany holds the rotating EU presidency in the upcoming period giving the main powerbroker in the EU a key role at a vital time. The smart money seems to think that Mr Rutte, who has a sceptical domestic audience to convince that it is value for money to support the southern states through the current crisis, will ultimately - along with his EU allies - bend sufficiently to allow an acceptable deal to be struck. Nevertheless, there may be a few sleepless nights and chewed fingernails amongst the diplomatic community in Brussels over the next few days.

Wayne Bartlett is an author for accountingcpd. To see his courses, click here.