Growth in the euro zone is likely to be very sluggish over the next decade, experts have warned, and the forecasts were bleak even before the new coronavirus hit the region.
"Even before the coronavirus outbreak, dark clouds had been gathering over the euro zone economy, with Italy in the eye of the storm," economists at ING warned Tuesday.
"Over the next 10 years, the region's potential growth rate will likely slow to a crawl while Italy faces a stagnation far worse than anything Japan has seen," ING's Carsten Brzeski, Bert Colijn and Inga Fechner said in a note.
Europe, and its single currency area of 19 countries within the euro zone, has experienced a prolonged financial crisis in the past decade and there were warning signs before it was hit with a major health crisis.
In the fourth quarter of 2019, for example, euro zone growth was just 0.1% quarter-on-quarter, marking its slowest growth rate since 2013, with its largest economies Germany seeing flat growth, and Italy and France seeing a 0.3% and 0.1% contraction, respectively.
Looking ahead, economists fear that the region is looking at a decade of meager growth expectations at best.
"In the next 10 years, demographic and structural headwinds, and a limited appetite for reform, could push the bloc's potential growth rate to less than 1%, down from the annual average pace of 1.4% of the previous decade," ING's economists said.
Coronavirus
President Donald Trump's trade war with China and the imposition of tariffs on imports — and the threat of heavy duties on Europe's auto industry — had weighed heavy on growth in 2019, and on forecasts.
That, alongside political uncertainty in its largest economy Germany, divisions over the EU budget and Brexit, were all factors for the regional economy to contend with. In the fall, the European Commission had forecast 1.2% growth for the euro zone in 2020 and 2021, and 1.4% for the entire European Union (excluding the U.K.).
But now the outbreak of the flu-like virus is certain to dent growth forecasts in the region in the short term, economists say, and will force the European Central Bank (ECB) to act.
"The past week has seen a sudden change in expectations for economic growth throughout the world as the virus has jumped continents and spread rapidly in Europe. As a consequence, even the most timely economic data are now of little value, and previous macroeconomic forecasts will have to be torn up. Most private sector forecasters, including us, have cut their forecasts for GDP growth. The ECB will do the same," Capital Economics' Chief Europe Economist Andrew Kenningham said in a note Tuesday.
"We suspect that the (ECB's) forecast for (euro zone) GDP growth in 2020 will be reduced from 1.1% to around 0.8%, with the projections for Germany and Italy likely to be cut particularly sharply. Forecasts for 2021 may also be reduced," he added.
Capital Economics had forecast sluggish growth for the euro zone anyway in 2020, but has downgraded these. "Even before the coronavirus hit, we were expecting GDP growth of only 0.7% in the euro zone this year. We have already revised this down to 0.5%."
The central bank's Governor Christine Lagarde said Monday that the bank was ready to take appropriate and "targeted" action to mitigate the economic impact of the virus, and could help businesses specifically impacted by the outbreak. The pressure on the ECB to act has only increased after the U.S. Federal Reserve cut rates by 50 basis points in a surprise move Tuesday.
Many economists are skeptical about how much central banks can help in this situation, unless they use targeted measures.
Professor of Economics at London Business School, Richard Portes, told CNBC Tuesday that "it's a very unusual situation in some ways."
"We think about demand shocks and supply shocks: In a demand shock, yes, monetary and fiscal policy (can be used) but with supply shocks, it's micro (economics). The trouble is with this one is that it's both, and I think policymakers are still trying to figure out and the result will be a lot of volatility in the markets because people don't know what they're dong," he told CNBC's "Squawk Box Europe."
Instead, Portes said stimulus measures should be "micro-targeted" toward specific sectors. "In a way, monetary policy might be the right way to go at that, for example, loan programs for specific sectors of the economy."