Italy and Spain are biggest benefactors of EU stimulus package

The European Union (EU)-funded multi-year stimulus plan finally began taking form last week with a growth pick-up probably now already under way.

Latest projections are that Europe’s economy is finally turning the corner from its worst crisis in the post-war period, after a devastating double-dip recession. Despite grim confirmation on Friday of another slump in the first quarter performance, there is strong optimism that the much expected rebound is on the way.

The dismal economic performance for the last quarter did not diminish prospects for recovery. The fiscal firepower waiting to be unleashed mostly on Europe’s weak southern economies is almost unprecedented and complements central bank emergency support that is locked in well into 2022.

Talks of slowing economic stimulus

Analysts say the prospect of EU cash flowing as soon as July with reopenings appearing plausible, means a recovery is tangible enough for European Central Bank officials to start talking within weeks about slowing stimulus so long as progress on jabs keeps coming.

“The worst is definitely over for the euro-area economy and the best is still yet to come, though we’ll have to wait a few more months before we get there,” said Neville Hill, an economist at Credit Suisse in London, who was speaking with Bloomberg.

He told Bloomberg, “we feel very encouraged that the economy will reopen this quarter and that should allow for a vigorous rebound later this year.”

Another sign of the Eurozone’s gathering momentum revealed itself on Monday with an index of purchasing managers showing manufacturing activity at the highest level in the survey’s 24-year history.

Meanwhile, the European Commission proposed reopening borders to fully inoculated travelers, a step toward a return to normalcy. The EU fiscal stimulus is designed to sustain the economic pickup after it takes hold, focusing most on the region’s perennially weaker members while dragging it in a greener and more digitalised direction.

Italy, the biggest beneficiary of aid

Italy, the biggest beneficiary of aid and arguably the region’s toughest growth challenge, has lined up grants, loans and its own top-up to ensure a flow of €261 billion euros (US$316 billion) in spending. Such is the scope and duration of the bloc’s stimulus plans that some economists are prepared to be optimistic on its outlook.

Marion Amiot, senior economist at S&P Global Ratings, said, “the plan is quite serious about reducing the economic divide in Europe… . It’s an opportunity to change the growth outlook.”

S&P reports that the overall effort could boost gross domestic product in the bloc by as much as 4.1 per cent in the next five years, though Amiot cautions the real impact will be hard to judge until the end of 2022.

The damage to repair is widespread, with the economy having gone through two recessions since the coronavirus struck, most recently shrinking 0.6 per cent in the first quarter. That’s on top of a tumultuous decade after the 2008 financial crisis, when much of southern Europe contended with stagnation or deflation.

While the EU fund is designed to forever change that narrative, officials know that throwing money at the problem isn’t enough, not least if implementation then falls short in countries with creaking bureaucracy such as Italy.