London (CNN Business)Europe’s top two economies are contracting at their fastest pace in decades, according to forecasts published Wednesday, underscoring the urgent need for EU officials to agree new measures to support workers and businesses affected by the coronavirus pandemic.
Germany’s top economic research institutes said Wednesday that Europe’s biggest economy is likely to shrink by 4.2% this year. It expects a contraction of 1.9% in the first three months of this year, and 9.8% in the current quarter. That would be the sharpest decline since record keeping began in 1970 and more than twice as steep as the most damaging quarter during the global financial crisis.
The dire prediction came as France’s central bank estimated the country’s economy shrank by around 6% in the first three months of the year. The central bank said the last contraction of a similar magnitude came in the second quarter of 1968, when weeks of demonstrations and general strikes sharply curtailed economic output.
Evidence of a severe recession in Germany and France is more bad news for other European countries such as Italy and Spain that have been hardest hit by the pandemic and are suffering even greater economic fallout.
Finance ministers representing the 19 countries that use the euro currency are struggling to agree new ways to provide support. They suspended negotiations on a new rescue package after 16 hours of talks conducted via video conference, saying they would reconvene on Thursday.
“Many sectors of the eurozone economy have closed completely, and others are operating well below capacity,” said Andrew Kenningham, chief Europe economist at Capital Economics. “Activity has fallen furthest in Italy and Spain because the restrictions there have been the most draconian.”
“While the pandemic itself may peak in the coming few weeks, some restrictions are likely to remain in place for months,” he added.
Portugal’s Mário Centeno, who chaired the meeting of finance ministers, said they “came close to a deal but we are not there yet.” He said in a post on Twitter that he remains committed to agreeing a sizable recovery plan that protects workers and businesses.
The package would be worth about half a trillion euros ($543 billion) in total, comprising credit lines, guarantees and employment protection programs.
“The set of measures I mentioned comes on top of national [fiscal] measures. The national measures … represent nearly 3% of EU GDP. In addition, you have liquidity support measures, which are already around 18% of GDP,” Centeno added.
Other measures have already been taken. EU limits on budget deficits have been relaxed to allow member countries to borrow more, and the European Central Bank has also pumped hundreds of billions into markets to prevent the shock triggering a new financial crisis.
Yet old divisions between countries have complicated a collective fiscal response in Europe. Nine of the countries that use the euro, including Italy and France, had called for the European Union to issue debt, dubbed corona bonds, to raise long-term finance for all member states to help repair the damage wrought by the pandemic.
German Chancellor Angela Merkel, backed by the leaders of Austria and the Netherlands, have said no. They have long opposed the issuance of debt at the EU level for fear that it would effectively mean their taxpayers are underwriting spending by poorer member states.