Pandemic is boosting eurozone imbalances, ministers to mull way out

The Covid-19 pandemic is increasing economic imbalances in the eurozone, the European Commission will tell the bloc’s finance ministers on Monday, but reforms and investments funded by European Union money should help address that.

Finance ministers from the 19 countries sharing the euro will hold monthly talks on Monday to discuss ways to counter the effects of the pandemic on the economy.

In a note seen by Reuters that is to form the basis of their discussions, the Commission said the impact of Covid-19 was especially visible in countries that were already vulnerable before the outbreak because of high debts.

“The Covid-19 shock appears to exacerbate existing imbalances within the euro area,” the note said.

"Member states most impacted economically by the Covid-19 crisis, because of the gravity of the pandemic or their dependence on highly exposed sectors, are characterized by … large stocks of government and private debt,” it said.

The Covid-19 crisis was therefore making existing problems with disparate debt trends among eurozone countries even worse, which could lead to members diverging economically.

“A number of the countries highly impacted by the Covid-19 crisis were in the recent past characterized by anaemic potential growth. Hence, the pandemic could also be exacerbating economic divergences,” the Commissions said.

The EU’s 750 billion euro recovery fund, which is to be jointly borrowed and repaid, was designed to address that problem, allowing highly indebted and very slow growing countries such as Italy to avoid boosting its debt even further.

“A strong implementation of relevant reforms and investments, while making full use of the EU support measures, should tackle the identified imbalances. Addressing imbalances going forward will be key to prevent the risk of accentuating divergences within the euro area,” the note said.

EU governments are now preparing plans of how they want to spend the money allocated to them in grants and cheap loans in the recovery fund. But to get the plans approved and get the cash, they have to take into account the Commission’s recommendations on how to fix imbalances in their economies.

The Commission pointed out last year that Germany and the Netherlands should boost investment and household income to cut their huge current account surpluses.

Italy, Greece, Spain, France or Portugal, however, had to tackle high public and private debts, competitiveness and productivity issues, it said. [Reuters]