Europe's Fiscal Antidote to Coronavirus Crisis Risks Deepening Economic Gaps

Date : 03/17/2020 @ 7:23PM
Source : Dow Jones News
Stock : FTSE 100 Index (UKX)
Quote : 5510.33  -305.4 (-5.25%) @ 4:45PM
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Europe's Fiscal Antidote to Coronavirus Crisis Risks Deepening Economic Gaps

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By Tom Fairless and Laurence Norman 

European governments have pledged hundreds of billions of euros to help economies, companies and workers hit by the coronavirus, applying tools developed during the euro crisis and casting aside strict prohibitions on state subsidies.

The stimulus moves, which come on top of increased government spending automatically triggered during a downturn, could help fiscally sound countries including Germany and the Netherlands to weather the growing economic crisis. But it may not alleviate hardship for weaker countries such as Italy whose high debt levels make a major fiscal boost harder to finance.

That divergence could aggravate an economic gap at the heart of Europe's currency union if it widens the gulf between the region's strong and weak economies, which in the long term could further cloud the single currency's future.

Only a small amount of the total amount pledged so far is stimulus spending that will go directly to business or workers, and most are commitments that may never be drawn on. The amounts are designed both as direct help and to boost confidence among banks, employers and investors that companies won't be left on the hook for the increasingly dire impact of the virus.

European Union finance ministers said Monday that already announced fiscal stimulus plans amounted to 1% of the bloc's output in 2020 and that liquidity support through government guarantees and deferred tax payments was at least 10% of the EU's GDP.

"These figures could be much larger going forward," the ministers said.

At the onset of the financial crisis in late 2008, the EU pumped EUR200 billion ($220 billion) into the economy, around 1.5% of GDP.

France and the Netherlands on Tuesday became the latest countries to open the spigot. France promised EUR45 billion in immediate aid for businesses and employees hit by the coronavirus pandemic, which is slowing or shutting down swaths of the global economy.

French Finance Minister Bruno Le Maire said provisional predictions show the response to the coronavirus will slash 1% from France's gross domestic product this year.

"This economic war will be long-lasting and violent," Mr. Le Maire said on French radio.

The Dutch government announced a raft of measures to support companies, ranging from tax exemptions to having up to 90% of wages paid by the government. The measures are expected to cost between EUR10 to EUR20 billion over the next three months, but that sum could increase, said Finance Minister Wopke Hoekstra. "There is no cap, we will do whatever necessary to keep jobs and help companies overcome this," he said during a news conference.

The move followed the crisis response measures of Germany, Europe's biggest economy and so far the country that has pledged the greatest action. Government officials said last week they would provide potentially unlimited government financing for disrupted businesses, including measures that helped Germany emerge from the financial crisis a decade ago largely unscathed.

Central to Berlin's plan is a EUR550 billion loan and loan-guarantee program for businesses of all sizes, though the government stressed that it has no limit on financial support.

Berlin will replace the wages of employees forced to work part-time, following a program developed during the financial crisis that will now be available more quickly and flexibly, and extended to temporary and agency workers. Berlin will also defer taxes and lower tax prepayments to ease pressure on businesses.

France is using similar tools. Mr. Le Maire also reiterated Tuesday in a radio interview that France would guarantee EUR300 billion in bank loans for small and medium-size businesses. "We won't have one small or medium-size business that doesn't have [the] liquidity that it needs," he said.

But Italy and Spain, two nations currently hit hardest by the virus, have been more cautious. Italy's government announced a EUR25 billion spending plan on Monday that included additional funds for health care, and provisions to suspend tax payments and provide mortgage relief to affected businesses and households. Spain on Tuesday announced up to EUR200 billion in support, including private funds the government hopes to mobilize. Only EUR17 billion of the total would be direct support.

Mario Centeno, president of the Eurogroup of eurozone finance ministers, said Monday that the eventual use of the eurozone's bailout fund wasn't ruled out although splits within the region have emerged on the issue. That has EUR410 billion in lending capacity left and could be directed, as in the past, at the eurozone's frailest economies.

"We are not taking any possible solutions off the table," he said. "We will defend the euro and our citizens with everything we've got."

In Brussels, the European Commission has also announced plans to pump tens of billions of euros into the economy, including by scrapping payments governments were due to make to the EU and by quickly implementing tens of billions of euros worth of unused funds to fight the impact of the virus. It is also guaranteeing loans to small firms and revving up action by its lending arm, the European Investment Bank, to do likewise. But the bloc's tools are limited because it remains largely decentralized.

Even without new fiscal measures, Europe's state-funded welfare systems provide broad automatic shock absorbers during a downturn or public health crisis, via generous unemployment insurance, sick pay and universal health care schemes.

In Britain, which recently left the EU, the Bank of England and the U.K. Treasury on Wednesday unexpectedly announced a joint package of initiatives to support British businesses and households, with the government announcing a GBP30 billion ($39 billion) stimulus. The UK on Tuesday also said it would offer GBP330 billion of loan guarantees to support businesses through the crisis.

The EU finance ministers on Monday agreed to loosen EU fiscal and state aid rules so governments can boost stimulus efforts and ensure companies have enough cash on hand to get through the coming weeks and months.

For now, finance ministers have agreed to exempt public spending, including stimulus measures, related to dealing with coronavirus from the bloc's strict government-spending limits. They could go further and suspend all efforts to slim deficits in the medium term if they believe the bloc is hitting a broad and severe economic downturn.

--Paul Hannon contributed to this article.

Write to Tom Fairless at tom.fairless@wsj.com and Laurence Norman at laurence.norman@wsj.com

 

(END) Dow Jones Newswires

March 17, 2020 15:08 ET (19:08 GMT)

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