Europe Is Dusting Off Its Crisis Toolkit to Tackle Coronavirus

(Bloomberg) -- European finance ministers will be presented with a menu of options to cushion the impact of the coronavirus crisis next Monday, though each country will have to pay for its own stimulus measures, the bloc’s economy chief said.

The measures will include “coordinated fiscal action” targeting sectors like tourism and transport that have been particularly hard hit by the spread of the deadly virus, European Commissioner for Economic Affairs Paolo Gentiloni said. Ministers, due to meet in Brussels on March 16, may also discuss ways to ease restrictions on direct state aid for struggling companies.

“This is a wake up call for the necessity of a coordinated fiscal policy at the euro-area level,” Gentiloni said in an interview on Monday. “It is clear that we need it, and it is clear that we need it now.”

While the comments signal that governments are willing to discuss straying from the bloc’s fiscal rules to limit the damage to the economy, Gentiloni repeatedly said that the use of common tools, such the gigantic euro-area bailout fund, isn’t being discussed. With borrowing costs set to rise for indebted countries if the crisis spreads, some investors may doubt their ability to finance rescues on their own.

Market Rout

European stocks were battered on Monday after a price war in oil dealt a further blow to investor confidence, already rattled by the spreading coronavirus. Peripheral euro-area bonds slumped, with yields on Italian 10-year paper rising by 35 basis points, amid mounting concerns about an imminent recession.

“For sure we will face serious consequences, we don’t have any element at the moment to say that we will have a euro-area general recession,” Gentiloni said. A contraction “is probable in certain countries,” he added.

Gentiloni is in charge of monitoring EU budget rules and the European Commission is empowered to sanction governments seen breaching them. The EU’s executive arm can also propose new legislation, though any changes would be subject to approval by national governments.

Governments are already taking steps to stem the fallout. Italy set aside 7.5 billion euros ($8.6 billion) to help families and businesses tackle the crisis. Germany plans to invest an additional 12.4 billion euros between 2021 and 2024 and take its first steps to help companies and workers affected by the fallout, such as looser rules for short-term work compensation. Greece suspended sales taxes and outstanding debt payments for four months for companies hit by the virus.

Such packages “are not sufficient to face the consequences of this crisis, but they are strongly needed,” Gentiloni said. His comments reflect a growing realization that there’s a trade-off between slowing the spread of the virus through measures such as travel restrictions and cushioning its economic impact.

Policy makers acknowledge that the economic disruption of the outbreak will go far beyond the initial supply shock that was anticipated after the crisis engulfed China. Key sectors from transport to tourism are under immense pressure as people, beset by fear or following government instructions, stay at home.

“It will be very difficult in these sectors to recover during the year,” Gentiloni acknowledged. While he refused to go into specifics about the measures the EU’s executive arm will propose, officials in Brussels expect the menu to focus on providing cheap loans or loan guarantees to businesses, possibly through national development banks, or deferring tax payments.

Proposed Measures

Other measures being examined, officials say, include some kind of special treatment for coronavirus-driven non-performing loans, and partial wage subsidies so that companies can retain workers through periods of weak demand. Governments have also asked the commission to look into what can be done to get around EU rules on state aid for companies that have been particularly hit.

The EU is no stranger to bending competition rules in times of turmoil: it did something similar during the euro-area crisis to allow governments to provide support to failing banks. The one step that the commission appears certain to take is offering full flexibility under the bloc’s fiscal rules -- meaning governments can spend as much as they need to protect their economies without worrying about deficit limits.

The EU can also provide some relief to companies directly. Regulators said they are considering helping airlines cope by loosening a rule on the use of airport slots. EU law requires carriers to use at least 80% of their slots or risk losing them the following year.

Assumptions about economic growth this year made only a month ago are proving “extremely optimistic,” Gentiloni said. “The situation has to be monitored day by day.”

To contact the reporters on this story: Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net;Nikos Chrysoloras in Brussels at nchrysoloras@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net;Chad Thomas at cthomas16@bloomberg.net

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