In the aftermath of the extraordinary meeting of the European Council and announcements by the European Commission (see other news), several EU Member State governments took additional measures on Wednesday 11 March to support their economies and counter the impact of the coronavirus epidemic.
The Italian government, whose country has been severely hit by the epidemic and which has been putting in place movement restrictions since the beginning of the week, has announced that it will urgently release 25 billion euros to support the national economy in the face of the crisis.
“This is 25 billion in financial resources, not to be used immediately, but to be used to deal with all the difficulties we are facing with this crisis”, explained Giuseppe Conte, the president of the Italian Council at a press conference, quoted by AFP.
On Wednesday afternoon, Mr Conte held a videoconference with the President of the European Commission, Ursula von der Leyen, to inform her of the difficulties faced by Italy. In a joint communiqué issued at the end of the meeting, they stressed the need for a “coordinated European response” as well as “strong solidarity” and stated that “actions taken by every Member State have an impact on the rest of the EU”.
The Commission has moreover confirmed to the President of the Italian Council that the flexibility enshrined in the Stability and Growth Pact will be “fully utilised” and that the State aid scheme for exceptional circumstances will also be applied.
On the same day, German Chancellor Angela Merkel hinted that in response to this extraordinary situation she was prepared to abandon the zero budget deficit rule in Germany. Containing the spread of the epidemic takes precedence over respecting fiscal rules, she explained at a press conference, according to statements reported by AFP.
The German government, which has already taken measures to facilitate partial unemployment and has blocked a €12.8 billion package for infrastructure investment, is expected to present additional measures on Friday to support its economy, including public loans to companies facing cash flow difficulties.
The French President, Emmanuel Macron, will make a televised statement on Thursday evening. On Monday 9 March, the French Finance Minister, Bruno Le Maire, who predicts a “severe impact on the French economy”, announced that tax breaks would be granted to companies threatened with permanent closure due to the economic impact of the coronavirus.
The subject will be back on the agenda of the Eurogroup on Monday 16 March (see EUROPE 12441/17). The European Commission is expected to come up with a menu of options that will be discussed by the European Economic and Finance Ministers, according to our information. According to Reuters, this would include a programme of low-interest loans for European companies whose business is affected by the impact of the coronavirus epidemic, which could be coordinated by the European Investment Bank (EIB). A European source confirmed to EUROPE that such a solution had indeed been discussed a week ago, but had not yet been discussed with the EIB at the time.
Relaxation of banking regulations
The coronavirus epidemic has also caused panic among European banks, which anticipate an increase in non-performing loans (NPLs) as a result of companies’ inability to repay their loans.
Several central banks have recently taken action to reassure the markets. After last week’s decision by the US central bank, the Federal Reserve, to lower its main policy rate by 0.5%, it was the Bank of England’s (BoE) turn to announce that it would lower its key rate from 0.75% to 0.25% on Wednesday March 11.
In France and Italy, the idea of lengthening the time before outstanding loans are considered “non-performing”, or of abandoning the counter-cyclical cushion demanded by the banks, is gaining ground.
In a statement released on Wednesday 11 March, the Finance Watch organisation warned against the temptation to relax banking regulations in response to the coronavirus epidemic. In its view, this would only increase the risk of a financial crisis in addition to a health crisis.
“Prudential rules exist to make sure banks remain resilient in times of economic crisis and can continue to lend in support of the economy. It would be contradictory to ease them when they are most needed”, explains Thierry Philipponnat, Head of Research at Finance Watch.
ECB action expected
All eyes are now turning to the European Central Bank (ECB), which is expected to detail its action plan to deal with the epidemic on Thursday 12 March.
During the videoconference between European heads of state on Tuesday evening (see EUROPE 12443/1), the President of the Monetary Institute, Christine Lagarde, is reported to have warned that without a coordinated European response, there is a risk of facing a scenario similar to that of the 2008 financial crisis, reports Bloomberg.
Indeed, financial markets expect the ECB to propose strong support measures, including a reduction in interest rates or possibly an expansion of its bond buyback programme. (Original version in French by Marion Fontana)