Europe Ponders Economic Stimulus To Counter Coronavirus Impact

By Jorge Valero

(EurActiv) — EU countries will consider a coordinated fiscal stimulus to spur the economy as the coronavirus could bring the eurozone economy to a recession, according to the latest OECD economic forecast published on Monday (2 March).

As the virus continues to spread in Europe, the European Centre for Disease Prevention and Control (ECDC) issued a statement on Monday describing the new risk of infection for Europeans as “moderate to high”.

“We have a situation that is very complex,” European Commission President Ursula von der Leyen said as she announced the Commission’s new response team tasked with coordinating measures to halt the outbreak.

She stressed the importance of “strong coordination at every level” among European nations, to provide a “comprehensive and coherent” response to the virus.

To date, more than 2,100 people have been infected with the COVID-19 virus in the EU, and 38 have died.

The ECDC estimates that at least 40,000 people die each year from seasonal influenza in the EU.

The impact of the COVID-19 and the measures adopted to contain the disease are inflicting serious damage to the European economy.

The Organisation for Economic Co-operation and Development (OECD) cut this year’s growth forecast for the eurozone to 0.8% from 1.1% but kept it unchanged for next year at 1.2%.

For the global economy, the organisation of the developed nations revised downwards its forecast by half a percentage point to 2.4%.

The OECD warned, however, that if the impact of the coronavirus proves “longer lasting and more intensive than assumed” in the projections, the global GDP growth could go down to 1.5%, and “could push several economies into recession, including Japan and the euro area.”

Against this backdrop, EU Commissioner for Economy, Paolo Gentiloni, said that European member states would be prepared to spur national economies in the event of a severe impact.

“The EU is ready to use all the available policy options if and when needed to safeguard our growth against these downside risks,” he told reporters, speaking alongside von der Leyen.

In this regard, he defended a “coordinated fiscal response” from the 27 member states. It “has to be very timely. You can’t take it too early, you can’t take it too late.”

European finance ministers will discuss their response to the coronavirus in a teleconference on Wednesday (4 March).

The ministers will share information on the immediate response, and their efforts to support national health systems, debt payments and risks to the labour market.

However, a decision on potential stimulus would not come at least until the regular Eurogroup meeting in Brussels, scheduled for 16 March.

The finance ministers of the G7 also were expected to hold a teleconference on Monday to coordinate their response to the virus.

The Commission and the ECB had already requested member states with fiscal space, especially Germany and the Netherlands, to invest more to revive the ailing economic growth.

Berlin and The Hague, however, have so far remained reluctant to pass spending programmes.

Italy, the worst-hit country in Europe by the disease, announced on Sunday a €3.6 billion stimulus, on top of the 900 million aid package already adopted to address the outbreak.

The Commission repeated that it was ready to consider a loosening of the Italian fiscal goals to give more space to public spending.

Gentiloni recalled that the EU’s Stability and Growth already includes clauses to deal with unforeseen events beyond the control the national governments, and the Commission would assess any member state’s request for flexibility under the fiscal rules “with the spirit of solidarity and understanding”.

In Europe, the spread of the virus is primarily affecting the tourist sector, transport, trade and supply value chain. Conferences continue to be cancelled, including Prowein, one of the largest wine fairs held in Dusseldorf (Germany), while staff fears are also forcing authorities to close institutions and buildings, including the Louvre museum.

The Commission has so far not factored in the impact of the virus in its economic forecast, which it will update in May.

But Gentiloni admitted that the scenario of quick recovery (a ‘V’ shape scenario) was overly optimistic.

“The duration of the outbreak and containment of measures are a key downside risk,” the Commissioner said.

The virus has already provoked severe falls in stock markets around the globe.

“Markets face significant uncertainty in the short term and remain at high risk of more downside given the unknowns around COVID-19,” said Shane Oliver, a global investment strategist at AMP Capital Investors.

Traders remain worried the disease “will disrupt economic activity more deeply and for longer than had been expected a week or so ago,” he told AFP.

Some investors are expecting that central banks, especially the Federal Reserve, will intervene with a monetary stimulus to boost the economy.

ECB vice-president Luis de Guindos said on Monday that the institution remains “vigilant” and is ready to adjust “all its instruments” to progress towards its inflation target.

But he added that the main response to the coronavirus should come from national fiscal stimuli.