Based on the economic data releases and news of recent weeks one could be forgiven for thinking of the Eurozone economy as a basket case, doomed to lag behind the recoveries of other advanced economies. Just this week, Eurostat confirmed that the currency union entered a second technical recession since the pandemic began, following GDP contractions of 0.6% and 0.7% in Q1 2021 and Q4 2020, respectively. In March, the well-documented struggles of the EU to get its vaccination programme off the ground contrasted sharply with the reports of the US and UK ramping up their respective vaccination drives at speed. However, the fortunes of entire economies can change rapidly in these unprecedented times.

Economic forecasters have become adept in recent months to look not only at traditional economic indicators such as unemployment figures, inflation rates and consumer or business confidence surveys to gauge the prospects of a particular country, but also to consider vaccination rates. Simply put, the quicker a country vaccinates its population, the faster lockdown restrictions can be lifted, which has a direct effect on the many businesses affected. After a year of lockdowns, social distancing and mask wearing, there is also a very significant impact on consumer sentiment once these restrictions are lifted, which in turn amplifies the effects of the reopening via increases in consumer spending and business investment, something that is already happening in the UK and the US.

Most EU member states have been able to significantly pick up the pace of their vaccine programmes since April, as deliveries by vaccine manufacturers increased. As a result of this, the European Commission now expects that at least 70% of the adult population will have received at least one dose of the vaccine by end of July. At Cebr, we have therefore upgraded our growth forecasts for the Eurozone to 4.3% in our latest Global Prospects report.

Apart from the vaccines, the coordinated fiscal and monetary support delivered by the European Central Bank and the Commission will be key in securing the economic recovery going forward. As part of this stimulus, the EU has launched a €750 billion recovery fund, nearly half of which will be disbursed in the form of grants. The money for this fund will be raised by the Commission in the capital markets – in other words, member states have agreed to the EU’s first-ever mutual borrowing instrument. While the legal authority for this is for now restricted to this one-off recovery instrument,  it sets an important precedent that could shape the future of the EU. If the fund is a success, proponents of a closer fiscal union will surely see it as an argument for the transfer of greater fiscal competencies to the EU level.

As with most things related to the EU, patience is required – the Commission still needs to approve the proposals on how national governments will use the funds, which means it will be late summer or autumn before money will start to flow. Coincidentally, that is also when Germany will elect its next Chancellor. Polls see the candidate of the Green Party, Annalena Baerbock, narrowly ahead of the CDU’s designated Merkel successor, Armin Laschet. A Green German Chancellor could push the EU even further towards closer fiscal integration.

Opposition to a closer fiscal union and to further rounds of quantitative easing could, however, come from the national courts. The German Federal Constitutional Court already has a reputation in Brussels following the 2020 ruling that asset purchases in 2015 did not consider the proportionality principle and represented unlawful conduct of monetary policy. For the time being, the German Court has been placated and indeed just this week it rejected a further complaint by German critics of the ECB asset purchasing programmes. However, the mood among German economist (and judges) might shift as the Eurozone recovery accelerates and inflation rises. It might be premature to write off further judicial challenges as the EU finds its way out of the current crisis.

For more information please contact: Kay Daniel Neufeld kneufeld@cebr.com phone: 020 7324 2841