Extraordinary times call for extraordinary measures. The EU announced last week that it would suspend the Growth and Stability Pact. The unprecedented move will untether member states from regulations designed to encourage sustainable fiscal policies and safeguard healthy competition and consumer rights in normal times. In addition, EU Commission President Ursula von der Leyen is set to announce further measures this week. These will be designed to help boost the EU economic recovery, including making changes to the Multiannual Financial Framework (MFF), the EU’s long term budget.
The news comes following announcements made earlier in the month by the ECB, aimed at appeasing initial fears over the impact the global pandemic will have on the EU economy and European markets. These include delaying stress testing banks while also easing certain capital rules that will allow the sector to lend an additional €1.8 trillion. The concessions will come at a cost however as banks have been instructed not to pay out dividends to shareholders this quarter. The ECB will also spend €750 Billion in bond purchases in a bid to address concerns over the sovereign debt market. It is unclear at this stage which, if any, loosening of restrictions will apply to the alternative lending market.
Individual countries have been equally quick to announce initial measures and stimulus packages of their own. These have primarily been aimed at supporting key sectors of their economies as well as maintaining and expanding social security programs while authorities impose severe restrictions on most activities, in a bid to contain the spread of the novel coronavirus. Below is a round up of the measures being taken by Europe’s largest economies, totalling over €1.5 trillion euros in financial commitments to date.
Europe’s largest economy has set aside over €750 Billion euros to address the crisis, taking on new debt for the first time since 2013. Measures include:
- €500 billion bail out fund for larger companies at risk due to the outbreak
- €50 billion for small businesses and the self employed facing bankruptcy
- unlimited loans from the state owned development bank KfW to companies facing liquidity problems (the state will guarantee 90% of each loan)
- €10 billion to support the growing needs of nationwide Social Security programs
In a similar vein, France has promised unlimited support for businesses, setting aside an initial €45 billion for companies and employees affected by the pandemic. There will be flexibility shown on corporate tax and social security payments during the crisis.
In addition, the French government will:
- Guarantee up to €300 billion of bank loans to support businesses
- Take an option on €1 trillion of guarantees from European institutions
- The government will also consider specific packages for companies that already have state holdings, such as the national carrier Air France.
Currently the world’s worst affected country, Italy’s initial stimulus package of €25 billion earmarks €1.5 billion for a health service already tragically buckling under the strain of the crisis. The same amount will be provided for the emergency services tasked with enforcing the strict quarantine measures that have been put in place to limit the spread of the virus.
The government will guarantee loans for businesses affected by the outbreak and Italy’s banking lobby has also confirmed that mortgage repayments will be suspended during the crisis with debt moratoriums in place for small businesses and households struggling with the consequences of the pandemic.
Spain has pledged a package amounting to €200 billion, which amounts to about 20% of its GDP. The package includes €100 billion in state loan guarantees aimed primarily at ensuring liquidity, with a specific focus on supporting SMEs through the crisis.
Extra measures also include a moratorium on mortgages and utility bills for vulnerable families as well as extra state support for workers who either lose their jobs or who are temporarily suspended from work during the crisis.
By comparison to its European neighbours, the UK’s approach has been a bit more reactionary and erratic, with a series of ever larger packages announced over the last few weeks, each attempting to fill the gaps of the previous one. This has culminated in a new approach which will see top government officials meet on a regular basis to assess the needs of the economy as they emerge, including addressing omissions to aid packages, such as those aimed at the self employed (which amounts to about 3.8 million workers in the UK). That said a number of tangible measures have been announced and these include:
- Unlimited package of loan guarantees for SMEs (the government will underwrite 80% of all loans)
- Direct lending from the Bank of England for large companies
- One year abolition of property tax for all affected sectors
- Various rent and mortgage holidays
- Grants to support small businesses
- A worker retention scheme where government will pay 80% of wages for workers placed on furlough (aimed at companies facing reduced activity during the outbreak)
In addition, the Bank of England has slashed interest rates to 0.1% and further increased its bond buying program to £645 Billion.
Across the EU, governments are announcing similar measures to those detailed above, generally targeting their assistance to primarily support the SME market and social services through a mix of tax breaks, grants, increased liquidity from banks, loan guarantees and reallocated funds from the central EU budget.
Despite these ambitious measures however, a word of caution needs to be sounded. The predicted global recession is likely to be worse than that of 2009 and in all likelihood even more will need to be done to help the European economy recover from the impact of this pandemic. Across the EU, current stimulus packages are averaging about 2% GDP, and the ECB has warned this week that this will likely need to be doubled in order to have the desired effect. We will be tracking how these measures develop in the coming weeks, make sure to check back in for the latest updates as they become available.