Newsletter: Light at the end of the tunnel, but still major hurdles ahead

Newsletter: Light at the end of the tunnel, but still major hurdles ahead

Monday, 11 January 2021

Funcas Europe

We hope you are starting the year in good shape.

On our side, we have prepared this first newsletter of 2021 looking ahead to try understand what will matter the most over the next few months.

We’ve recorded a post-Brexit podcast with Jill Rutter, Brexit analyst at UK in a Changing Europe, and moderated by Carlos Carnicero Urabayen. With the new free trade deal in place and the UK outside of the EU, we now see Brexit as a new start for the relationship between both parties.

We have also reached out to Miguel Carrión, Funcas Europe analyst, and Saioa Armendáriz, independent economic consultant, for their key forecasts for the European economy in 2021.

In a nutshell, the health crisis will continue to shape the euro area’s economic performance in 2021, explains Armendáriz. On the other hand, excessive Covid-vaccine optimism, company insolvencies and non-tariff barriers on trade between the EU and the UK are the biggest risks to consider for this year that has just started.

See at the end what we are reading these days.

Podcast –A new start after Brexit

Looking ahead, Brexit is the beginning, not the end. After decades of being part of the most economically and politically integrated region in the world, the EU and the UK are just starting a new relationship. What are the key areas where we expect to see growing cooperation in the years to come? How bad are for the economy the non-tariff barriers that are hitting businesses and consumers on both side of the Channel? How will Biden’s presidency affect the transatlantic relationship with the UK now outside the EU?

We tried to cover all those questions – and others! – in less than one hour.

Access here & subscribe to our podcast.
3 key risks to keep an eye on in 2021, Miguel Carrión

The year 2021 offers reasons for optimism, with the roll-out of vaccines and the EU’s recovery fund. However, there are significant risks ahead that the EU may not be adequately prepared for.

First, excessive optimism on Covid-19 may be a problem. Mass vaccination is a logistical challenge and it may take longer than people expect to achieve herd immunity. People lowering their guard may lead to the pandemic continuing to be more severe than expected. A budding third wave could impact the economy in the first half of the year. Also, vaccines may embolden governments to withdraw economic support prematurely. And economic sentiment, which has improved with the news of vaccines and their rollout, can turn sour if things don’t improve quickly and people become disappointed.

Second, the biggest unaddressed economic danger of Covid-19 is company insolvencies. The European Commission has estimated solvency support needs in the hundreds of billions of euros, maybe exceeding a trillion, but government aid has mostly focused on liquidity. Member states even eliminated a proposed solvency-support instrument from the recovery plan. Banks may not be adequately capitalised to withstand the amount of non-performing loans that could be generated by this crisis. Insolvency moratoria have delayed this impact of the pandemic, but won’t do so indefinitely.

Finally, the EU and the UK reached a zero-tariff Brexit agreement, but the UK will be outside the customs union. The impact of non-tariff barriers on trade early in 2021 may have been substantially underestimated.

You can read more here
Euro area economic outlook: New year, old clouds, Saioa Armendáriz

The year 2020 ended with the arrival of vaccines to euro area countries, which had a positive impact on confidence. The coordinated distribution of vaccines among member states in December, and the lifting of containment measures on the horizon, raised expectations about an improving the economic outlook. Since then, raising contagion rates forced the introduction of further restrictions to mobility and targeted sectors, signalling a complicated short-term outlook.

Indeed, soft indicators already showed the global economy deteriorating in December for the second month in a row, as expanding covid-cases led to softer activity. The slowdown was particularly strong in the euro area. Activity was dragged by new lockdown measures since mid-October and the dependence on services sectors; which completely offset the recovery seen in manufacturing. We can expect these trends to continue in coming months, with risks to the downside, driven by the risk of persistent restrictions on activity.

Thus, the health crisis will continue to shape the euro area’s economic performance in 2021. The distribution of the vaccine will support medium term confidence, but it will take some time to reach the widespread immunity; meaning that activity will remain limited in specific sectors for some time yet. Even if fiscal and monetary policy remain supportive, the hit of the pandemic on private sector incomes, together with the weakening of corporate balance sheets it has triggered, will imply levels of consumption and investment remain subdued over the year.

What we are reading

The EU, China and strategic trade: context and priorities 
“The EU must ensure that non-populist, positive sum relations with China prevail, while convincing the world (and the US) that engagement is necessary and WTO reform possible. The recently signed EU-China investment treaty (CAI) is a step in the right direction”, argues Pau Ruiz Guix in Agenda Pública. 

What is sovereignty?
Brexiters have got the autonomy they craved, but what exactly is it good for?, asks Martin Sandbu.

Corporate insolvencies during COVID-19: keeping calm before the storm
Measures in major economies have protected companies from COVID-19 related insolvency, but have also protected weak firms. Nevertheless, support should remain as long as necessary, while cumbersome insolvency processes should be reformed for the long-term.

COVID-19: What you need to know about the coronavirus pandemic on 11 January
Good read with key updated data put together by the World Economic Forum.

Have a nice week!

Raymond Torres, Funcas Europe Director

Funcas

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