EU recovery runs into headwinds

The European Union's economy saw a steady recovery in 2021, but the pandemic and a volatile geopolitical environment are among factors that may hold back further expansion, analysts said.

The Winter 2022 Economic Forecast issued by the European Commission recently projected that, following a notable 5.3 percent expansion last year, the EU economy will grow by 4 percent in 2022 and 2.8 percent in 2023.

Growth in the euro area is also expected at 4 percent in 2022, moderating to 2.7 percent in 2023. The EU as a whole reached its pre-pandemic level of GDP in the third quarter of 2021 and all member states are projected to pass this milestone by the end of 2022.

Overall, inflation in the euro area is forecast to increase from 2.6 percent in 2021 (2.9 percent in the EU) to 3.5 percent (3.9 percent in the EU) in 2022, before declining to 1.7 percent (1.9 percent in the EU) in 2023, the report said.

The robust rebound in economic activity started in the spring of 2021 and lasted till early fall. But growth has since slowed due to intensified headwinds, the report said.

EU Commissioner for Economy Paolo Gentiloni said that multiple headwinds have chilled Europe's economy this winter: the swift spread of the Omicron coronavirus variant, a further rise in inflation driven by soaring energy prices, and persistent supply-chain disruptions.

"With these headwinds expected to fade progressively, we project growth to pick up speed again already this spring," he said. "Uncertainty and risks remain high."

Even though the impact of the pandemic on economic activity has weakened over time, containment measures and protracted staff shortages could drag on economic activity, it said. They could also dent the functioning of critical supply chains for longer than expected. By contrast, weaker demand growth in the near term may help to resolve supply bottlenecks somewhat earlier than assumed.

Valdis Dombrovskis, executive vice-president of the European Commission for an economy that works for people, said that with the pandemic, the EU's immediate challenge is to "keep the recovery well on track".

Despite the virus' grip on Europe, with still-high daily deaths, some EU countries have started to loosen COVID-19 restrictions, said Ding Chun, director of the Center for European Studies at Fudan University, who notes that these countries would be unable to maintain economic momentum if the restrictions drag on.

Varying pace

Ding said that after reopening, the European economy as a whole would inevitably rebound. But the pace of recovery would differ across the region because of the differences in fiscal deficits and debt burdens among the nations, as well as the differences in their abilities to control inflation.

He Yun, an associate professor in the School of Public Administration at Hunan University in Changsha, said that high vaccination rates and economic stimulus have set Europe on course for a strong economic recovery, but a number of major challenges lie ahead.

First, the uncertainty over the crisis in Ukraine could darken Europe's overall economic prospects as well as disrupt its energy security, she said. "Currently Russia supplies about 40 percent of the EU's natural gas, and gas pipelines running through Ukraine carry about 13 percent of Europe's total gas imports," she said. "A new Russia-Ukraine conflict could significantly threaten European energy supplies and push gas prices higher, thereby disrupting Europe's economic recovery."

Moreover, member states have increased their debt levels to varying degrees during the pandemic.

"Coordinating debt reduction among member states will be another key priority for the EU to sustain its economic momentum," she said.

Third, the EU has announced an ambitious target of allocating 25 percent of its future budget to support climate action. Mobilizing this fund and allocation of it could be a major point of contention the EU needs to tackle to facilitate its stated green recovery, she said.