Published: 2021
Total Pages:
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The COVID-19 pandemic caused an unprecedented global health crisis and a deep economic recession. Swift and comprehensive support measures in the areas of monetary, fiscal and prudential policies helped contain the COVID-19 crisis, most notably by preserving favourable financing conditions, stabilising household income and providing liquidity support to the corporate sector. Nonetheless, economic activity contracted sharply in the second quarter of 2020. The economic impact of the pandemic was highly uneven on account of the pronounced dispersion of value-added growth across sectors of economic activity and across euro area countries. The easing of measures towards the end of the second quarter facilitated a strong rebound in economic activity in the third quarter. The decline in real gross domestic product (GDP) in 2020 amounted to 6.9% in the euro area and 6.2% in the EU, largely driven by steep drops in private consumption on the back of surging forced and precautionary savings as well as investment. While the rollout of vaccines created an anchor for medium-term expectations, new waves of COVID-19 infections heavily weighed on recovery prospects. Short-term uncertainty remains very high on account of delays in the rollout of vaccinations and concerns about the effectiveness of vaccines with respect to rapidly spreading COVID-19 virus mutations. Economic growth is therefore expected to gain momentum only in the second half of 2021. Significant uncertainty also persists over the medium term, as the size of spillovers from heightened vulnerabilities in the non-financial corporation (NFC) and household sectors to the financial system and public finances as well as the scope of permanent structural changes as a result of the COVID-19 crisis remain unclear. The main source of systemic risk in the EU originates from the negative impact of the pandemic on economic activity, rising solvency pressures in the private sector and their feedback effects on the financial system. To date, the swift and broad-based policy support measures have helped stabilise household incomes and mitigate the decline in the cash-flow of the corporate sector. But debt service moratoria are gradually phased out, while other government support programmes are likely to become more targeted and will be terminated at some point-not least depending on the perceived fiscal space in individual Member States. In the meantime, firms in several sectors continue to suffer from a substantial fall in revenues after exhausting their cash buffers and face difficulties in rolling over their maturing debt. There is scope for improving the targeting of public support measures. Improved targeting of public support measures could increase their efficiency by avoiding support to (i) firms that are able to survive without support; and (ii) unviable firms that are eventually bound to fail even with public support. Looking ahead, public support measures will need to shift from a defence of the pre-pandemic status quo to more targeted solutions that help viable companies to adjust to the post-pandemic world. Phasing out across-the-board measures is particularly warranted when these delay the recognition of loan losses.