Eurozone economy to shrink between 8% and 12% this year

Countries that rely more heavily on tourism will likely be harder hit, ECB president says

European Central Bank President Christine Lagarde

European Central Bank President Christine Lagarde on Wednesday warned that the eurozone economy will likely shrink by between 8% and 12% this year, a deeper downturn than previously anticipated, as governments battle the coronavirus pandemic.

Lagarde's comments are the latest signal that the ECB is preparing to increase its stimulus as soon as next week, in an effort to shore up plunging economic growth and inflation. Analysts expect the bank to vastly scale up a recently unveiled €750bn ($821.6bn) bond-buying program at a policy meeting on 4 June.

Speaking at an online youth dialogue backed by the European Parliament, Lagarde said recent expectations of a 5% economic contraction for the euro zone this year were "very likely... out of date."

Instead, the region's economy would likely contract by somewhere between 8% and 12% this year, or around double the rate during the 2008-09 financial crisis, she added. But the scale of the region's downturn will be relative to how quickly European nations lift national lockdowns and allow economic activity to return to something more normal. According to Lagarde, countries that rely more heavily on tourism will likely be harder hit, she said.

The ECB laid out three economic scenarios earlier this month suggesting that the eurozone economy would shrink by between 5% and 12% this year. The bank will publish fresh economic forecasts for growth and inflation next Thursday, and its top officials have signaled they will step up their stimulus measures if the outlook disappoints.

Still, Lagarde said she didn't expect a new debt crisis to emerge in the eurozone. She argued that European governments are right to increase their debts to combat the fallout of the pandemic, and suggested those debts would be manageable because interest rates are extremely low.

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