Facing recession, Europe grasps for ways to limit damage

FRANKFURT, Germany (AP) – Suddenly staring recession in the face, European leaders are lining up an array of tax breaks, financial support for companies and likely central bank measures in the hope of preventing the coronavirus outbreak from dealing long-term damage to the economy.

Expectations have grown that European Central Bank (ECB) officials will announce more monetary stimulus when they meet today, after the Bank of England acted yesterday and the United States (US) Federal Reserve last week.

The European Commission plans to set up a EUR25 billion (USD28 billion) investment fund to support the health care system, businesses and labour
market measures. Yet any such actions will likely be more damage limitation than cure. Monetary stimulus and government spending can spur demand for goods. But the coronavirus deals a shock from the supply side by closing businesses and making people stay home, highlighted by Italy’s dramatic decision this week to limit travel and public gatherings across the country. Lower interest rates or tax cuts cannot solve that.

Meanwhile, action to help the 19 countries that use the euro currency faces constraints from the lack of a large central treasury, a hurdle other large economies like the US and China do not face.

“The world is facing a medical emergency that monetary and fiscal policy cannot fix,” said Chief Economist at Berenberg private bank Holger Schmieding.

The best policymakers can do for the economy is to prevent the virus from dealing prolonged damage even after the outbreak ends, to keep small and medium-sized companies that provide most of the jobs in the economy from going out of business due to a short-term issue beyond their control.

Among the most affected are companies involved in travel. The number of people going through European airports is expected to fall by 187 million this year, hurting hotels, restaurants, cabdrivers and airlines. Lufthansa is cutting up to half of its flights from April. Ryanair suspended all flights to and from Italy. Exhibition centres have seen trade fairs postponed and football matches are taking place in empty stadiums.

The investment fund announced on Tuesday night by European Commission President Ursula von der Leyen is drawn from the existing European Union (EU) budget. The 25 billion size of the fund is only around 0.1 per cent of the annual EUR18.8 trillion (USD20.7 trillion) EU economy.

Von der Leyen said national leaders including German Chancellor Angela Merkel and French President Emmanuel Macron agreed during a video conference on Tuesday to “use all the tools at our disposal so that the European economy weathers this storm”. That includes being flexible in EU rules limiting debt and coming up with clear guidelines on permissible state aid to companies.

“We will make sure that state aid can flow to the companies that need it,” she said.

At the national level, Italy, which has been hit hardest by far by the virus outbreak, is earmarking EUR25 billion to confront the crisis. It will support health services, ensure people do not lose jobs due to travel restrictions, and support families by, for example, delaying payments on mortgages and taxes. More detail on the aid is due tomorrow.