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COVID-19 restrictions could mean fourth quarter contraction in parts of EU, ECB's De Cos says

FILE PHOTO: Plaza de la Villa is seen almost empty during the night-time curfew set as part of a state of emergency in an effort to control the outbreak of the coronavirus disease (COVID-19), in Madrid, Spain October 28, 2020. REUTERS/Juan Medina

MADRID (Reuters) - Spain and other European economies will slow and could contract in the fourth quarter of 2020 because of new restrictions to contain the coronavirus pandemic, European Central Bank policymaker Pablo Hernandez de Cos said on Wednesday.

Bank of Spain chief De Cos told Spanish lawmakers that the resurgence in COVID-19 cases was creating uncertainty over the strength and persistence of the recovery in Europe.

“The widespread implementation of new measures to contain the health crisis could lead to a significant slowdown in the expansion of activity, and even to a contraction, at least in some countries or sectors in the fourth quarter,” he said.

With new infections straining their health systems, the biggest euro zone countries have begun imposing new lockdown measures, dealing a blow to services businesses in particular.

The 19-country euro zone contracted by 11.8% in the second quarter as lockdowns to halt the pandemic’s first wave stalled activity but rebounded strongly, by 12.7%, in July-September.

Spain is among the nations worst affected by COVID-19, with more than 1.2 million cases and over 36,000 deaths.

Speaking in parliament, De Cos said the recent evolution of the pandemic meant the worse of the central bank’s two projected economic scenarios for Spain, which foresees a contraction of 12.6% in 2020, was now more likely.

Warning of potentially higher public debt, De Cos said Spain’s budget plan should include annual fiscal measures to reduce the public deficit once the health crisis is over.

After the government presented a budget plan last week that foresees increased spending on social benefits and infrastructure, De Cos urged Spanish lawmakers to make an in-depth analysis of both revenues and spending policies.

Reporting by Jesús Aguado and Emma Pinedo; Editing by Catherine Evans

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