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Europe Pushes to Avoid Economic Calamity By Extending Crisis Aid

imageForex2 hours ago (Jul 03, 2020 12:36AM ET)

(C) Reuters. Europe Pushes to Avoid Economic Calamity By Extending Crisis Aid

(Bloomberg) — European governments are fast learning that they’ll have to live with aid programs to save jobs and businesses longer than thought to keep the economy from falling off a cliff.

Across the continent, furlough programs that shielded close to 50 million jobs at the height of lockdowns, as well as tax deferrals and loan moratoriums, are being extended even as restrictions on movement are lifted. That’s because the sustainability of the economic bounce back is uncertain, with many businesses still closed or serving fewer customers than before.

The outlook has forced officials to set aside concerns over rising debt to prolong their crisis measures, some of which had initially been set to expire this week. The alternative would risk a greater spike in unemployment, spook already cautious consumers and dent the recovery.

“Governments have to tread a fine balance between cutting support and watching the impact on the economy, or continuing the support, perhaps more generously than originally envisaged, and watching finances balloon,” said Peter Dixon, an economist at Commerzbank AG (OTC:CRZBY). “So its a very tricky balance to strike. Maybe governments underestimated the demand for support.”

Another reason to remain wary is that some places have seen a resurgence in the virus. Cases have surged in the U.S., while the English city of Leicester and some districts on the outskirts of the Portuguese capital of Lisbon have reinstated lockdowns to contain new clusters of the pandemic.

Core to the measures to combat the economic slump were government-subsidized furlough programs, which kept workers in employment. The U.K., Italy, Spain, Austria, Switzerland and Ireland have all expanded theirs through at least the end of August. France has introduced a new version of a partial furlough scheme that companies could use for up to two years.

Germany loosened the conditions on its longstanding Kurzarbeit program to make it easier to protect workers’ wages during the pandemic, and will extend that relief if needed.

In many cases, it’s not simply a case of extending support, but adjusting as the situation evolves. The Peterson Institute last month recommended shifting carefully from funding job retention to wage subsidies to help get people back to work.

It also said the usual reallocation process that allows some firms to collapse shouldn’t apply now. Given the extreme and unusual situation, its view is that protecting businesses and jobs should get a higher priority than normal.

What Bloomberg’s Economists Say…

“Europe’s coronavirus outbreak will be the biggest peacetime economic shock on record — that much is clear. Less certain is how quick the rebound will be and how far social distancing will allow it to run.”

–Read the full EURO-AREA INSIGHT

The challenge of unwinding stimulus is a lesson that’s long been apparent to central banks. More than a decade after the financial crisis, many had barely moved policy off emergency settings. Their efforts to get back to a more normal stance were, on various occasions, scuppered by sluggish growth, weak inflation or market volatility.

For governments, the need to act is so far outweighing any immediate budgetary concerns. There’s also the argument that pulling away the crutch too fast could choke off growth and do even greater damage to public finances.

Italy is a case in point. Even with the debt ratio set to top 150% of GDP this year, it’s extended tax breaks for companies and lengthened its furlough program for workers to 18 weeks from an initial 14 weeks. Rome is considering a further extension, Ansa news agency reported on Tuesday.

While the measures deployed across the region were sweeping, they have their limits, and some industries have been hugely damaged.

The International Monetary Fund forecasts that the euro area and the U.K. economies will shrink by more than 10% this year, among the sharpest declines in the world. Companies including Airbus SE (OTC:EADSY), Swissport and Royal Mail (LON:RMG) Plc have announced thousands of job cuts, and unemployment is rising.

That’s keeping the mood cautious even as measures of confidence, retail sales and activity rebound from their lockdown lows.

For governments, the high uncertainty means they’ll probably have to tweak their schemes somewhat on the fly — just as they did when they launched them a couple of months ago.

“As time passes, we will have more evidence and that will be the moment when we can adapt the economic policy instruments,” Bank of Spain chief economist Oscar Arce said. “We have to wait a little more,” he said, “to see what the outlook will be like.”

(C)2020 Bloomberg L.P.

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