Europe Seeks to Ward Off Recession From Deadly Virus

(CN) – Besides the danger of killing many more people across Europe, the novel coronavirus outbreak is threatening to bring about a global recession that could hit the continent hard with falling demand for its exports, a dearth of tourists and a rash of bankruptcies and layoffs.

Europe is looking at warding off a catastrophic recession with an infusion of spending even if that means piling up more debt on top of already high debt levels.

On Thursday, the European Union was considering scrapping fiscal rules that prevent member states from running up debts. Those rules were imposed after the bloc was devastated by a debt crisis following the 2008 financial meltdown.

Several European states, most significantly Italy, are struggling to rein in extremely high public debts. Now Germany and other solvent European countries are coming under pressure to open up their purse strings to help the EU overcome this crisis.

The European Central Bank sits next to the river Main in Frankfurt, Germany. (AP Photo/Michael Probst)

Also Thursday, the European Central Bank stepped in to provide relief. The ECB announced a $133 billion stimulus package and other measures to keep credit flowing and businesses and households afloat. But it did not lower its historically low interest rates to the disappointment of some.

The ECB’s measures, though, did not calm investors and may have even helped drive European stocks down in a massive sell-off initially sparked by U.S. President Donald Trump’s Oval Office address on Wednesday night announcing flights from Europe would be stopped. Italy’s stock market fell by 17% and other stock exchanges in Europe lost about 12% in value. These losses were the worst ever for Europe’s stock markets.

The ECB’s $133 billion plan involves boosting its monetary policy to buy government bonds and other assets, known as quantitative easing, to inject liquidity into the economy. It also announced a fresh program of preferential loans to encourage bank lending to small businesses.

Christine Lagarde, the ECB president, said the outbreak will cause a major shock to Europe’s economy, though she was optimistic the downturn will be short-lived. The bank forecasts the economy will pick up in the second half of the year.

“I think it is clear to all of us that the economies of the world and certainly the economies of the euro zone are clearly facing a shock,” she said at a news conference at the ECB headquarters in Frankfurt, Germany.

But she said the euro zone would likely recover by the summer.

“We regard the current shock as severe, but still temporary if the right set of policy measures are decided by all players,” she said.

The threat of a recession may depend on what happens with the coronavirus, known as COVID-19, and whether it can be contained quickly. Europe is racing to fight the virus, which has continued to spread at alarming rates in Italy, France, Spain, Germany and the United Kingdom, the largest European economies.

On Thursday, Italy reported its worst day yet with 2,249 new confirmed cases and 189 new deaths, bringing the total number of deaths to 1,016 and the total number of infections to 15,113. Of those infected, 1,258 have recovered while 1,153 are in intensive care, Italian authorities say.

So far, Italy has said it plans to spend $27 billion to handle the crisis and help those hurt economically by a nationwide quarantine that’s closed many businesses. Italy also is suspending mortgage payments and its banks are ready to offer debt holidays.

But Italy is already strained under debt, its government bonds are risky and its banks weak. Its national debt is calculated at about 135% of its gross domestic product and a major crisis in Italy could see the country needing to be bailed out by the ECB and in turn by the EU’s richer countries, such as the Netherlands and Germany. One concern is the crisis in Italy and other debt-ridden EU countries could be so big as to overwhelm even the resources of Germany and the EU.

With the coronavirus outbreak worsening, Germany is considering breaking with its strict spending limits – the so-called debt brake, a politically sacred measure forcing it to balance its federal budget.

Spectators have their temperature measured as they enter the Via Del Mare Stadium in Lecce, Italy, on March 1, 2020. (Donato Fasano/LaPresse via AP)

The European Commission, the EU’s executive branch, is also preparing proposals to relax the bloc’s restrictions on allowing members to provide state aid to domestic businesses. The EU views state aid as unfair to competition.

On Thursday, many wondered if the ECB was too cautious. Unlike the Bank of England and the U.S. Federal Reserve, the ECB did not lower interest rates to offset the emergency. But its rates are already historically low and interest cuts by the other central banks have done little to calm investors.

Lagarde dismissed the need for lowering rates and urged national governments to take more action. Her comment appeared to be a nudge for Germany to loosen its purse strings.

Germany is Europe’s biggest economy and it runs budget surpluses but its tight fiscal policy is often criticized as too conservative to the detriment of the rest of Europe. Economists say expensive direct payments to individuals and businesses and quick credit lines may be needed to overcome this crisis.

Some analysts said the ECB needed to come out with an aggressive set of measures to calm fears over the coronavirus pandemic and urged Lagrande to perform a repeat of a famous moment when Mario Draghi, her predecessor as ECB president, said in July 2012 that the central bank would do “whatever it takes” to save the euro. His statement calmed markets and helped the EU overcome a debt crisis following the Great Recession after the 2007-2008 financial meltdown.

“I call it decisiveness, I’m sorry to say,” Lagarde said about the ECB’s measures in response to reporters asking whether they would be enough. “I don’t claim to be ‘whatever it takes’ No. 2.”

She added: “We are facing something that is different from the great financial crisis.” Unlike then, she said the economy is facing shocks from supply chain interruptions, a decline in demand for goods and uncertainty about how bad the pandemic will be.

Faced with such a scenario, Lagarde urged Europe’s political leaders and the EU to have a “coordinated fiscal response.”

Following the Great Recession, the EU imposed strict limits forbidding member states from running up deficits, a policy known as austerity. This policy has kept spending in check in heavily indebted countries like Greece and Italy, but the tough fiscal policy is also a source of much debate within the euro zone because many economists argue it’s been a drag on economic growth and left many Europeans, especially in the poorer south, bitter about the EU.

Lagarde did not specify what steps EU states should take, but said increased public spending was likely to happen.

“We will only deal with this shock if we come together,” Lagarde said. “I think all governments need to be on deck and ready to act.”

Analysts with Teneo, a London-based political risk firm, said the ECB’s stimulus measures “decrease the pressure on politicians to quickly comply” with Lagarde’s calls for “bold and coordinated fiscal expansion.”

“At the same time,” Teneo said in a briefing note, “Lagarde’s presentation of the ECB’s package today leaves governments firmly on the hook.”

(Courthouse News reporter Cain Burdeau is based in the European Union.)

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