Europe to Spur its Ailing Recovery

News came as the vaccine rollout in Europe faces difficulties, postponing the return to a full-speed economy, and there are doubts about the size of the European stimulus. French president Emmanuel Macron and analysts have questioned whether the €800 billion fund will be sufficient to cope with three waves of the virus and accompanying restrictions. Moreover, while the US recession was half of the European downturn last year, Washington’s extra spending is twice the size of the European stimulus, and President Joe Biden’s administration is considering a fourth package. A new EU joint stimulus does not appear in sight. But member states are ready to consider national additional measures, given that the EU economy will not return to its pre-crisis level until mid-2022. To that end, the bloc will continue to suspend the Stability and Growth pact, the rules controlling national deficit and debt levels, into next year.

Europe needed more than a decade to recover the pre-crisis investment levels in the aftermath of the last financial crisis. Now it does not want to commit the same mistakes. Challenges ahead are many. In spite of the favorable financing conditions facilitated by the European Central Bank’s (ECB) loose monetary policy and the extraordinary levels of public support, lower profitability and elevated uncertainty are expected to weigh on investment, said the Commission in its autumn forecast. Investment in the EU and the euro area are not expected to remain their pre-pandemic level. Looking at the post-pandemic world, the Commission is working on a review of state aid rules to simplify and streamline the process, in some cases, to facilitate public support in priority areas, including the Green and Digital agendas. In regards to corporate finance, support should move from short term measures to funding that spurs investment and innovation, including more equity or equity-type finance.

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