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Europe fails to agree a coherent virus response

Markets are hoping that the damage being done by the antivirus policies will be short lived, but European leaders are still squabbling about the response.

Markets are hoping that the damage being done by the antivirus policies will be short lived, but European leaders are still squabbling about the response.

by
John Redwood

in Features

24.04.2020

This week's publication of the purchasing managers’ survey figures for the leading economies for April produced figures as dire as expected. These numbers combine recent experience of companies relating to orders and output. These are surveys of the opinion of people in business about what they think might happen next.

Any number over 50 implies economic growth. Given that many businesses are prevented from trading by recent antivirus measures, the surveys naturally capture the lack of current work and the worries managers have about the immediate future. The figures from the Eurozone and UK came in at 13.5 and 12.9, respectively – well below anything seen during the banking crash of 2008-9. The US and Japan managed 27, also below the great recession level.

Markets accepted these numbers, even though they were worse than some of the forecasts before the release. The huge amount of money being pumped into bond markets by central banks is having its effect, sustaining asset price levels in the face of the bad news. This can work up to a point, but should individual companies stop paying interest on bonds or go into administration, prices of those bonds and shares will then have to adjust to the reality. 

Hopes of a short, sharp shock

Markets are hoping that the damage being done by the antivirus policies will be short lived. They are looking to governments to supply cash in the form of grants and soft loans in the meantime to keep large swathes of the corporate sector in business until the day when they can trade again.

This week has offered a contrast in the ability of government to help between the US and the Eurozone. The US, despite the bitter battles between Republican and Democrat, saw agreement reached in the Senate on a further package of $428bn of support. This was extra spending for health, and more cash for loans at 1% interest for small business to see them through the absence of cashflow. The recently-launched loan scheme proved very popular. It comes on top of the $2 trillion package of measures already announced.

The European Union (UN) met again to try to agree further support for economies damaged by the pandemic, but the meeting of Heads of Government ended with a renewed request to the Commission to try to come up with a plan which could get support from the member states.

Big divides

The Heads of Government approved the €540bn package agreed early in April, and expressed the hope that the loan schemes that made up the bulk of that could come into operation by 1 June. Businesses in Eurozone countries have had to rely more on national government and bank responses so far.

Summing up the unproductive exchanges, the President of the Council, Ursuala von der Leyen, could only produce generalities and principles. We are told the EU will draw on its values of solidarity, cohesion and convergence. It will stress a fully-functioning single market, make an unprecedented investment effort, use a functioning system of governance and act globally.

Behind this unusually bland and short text lay big divides. The southern states and France wanted the EU to issue bonds, to spend the money in the worst affected countries in the current crisis. Germany, Austria and the Netherlands objected fundamentally to the idea of shared risks with money borrowed partly at the expense of their taxpayers being spent elsewhere. In an attempt to find a compromise on German terms, they explored the possibility of the Commission borrowing against its seven-year budget revenues, to spend a bit more in the early years of the budget period. There was also some discussion of a bigger overall EU budget. The language of the Conclusions could only managed that the Commission "should clarify the link with the MFF (seven-year budget) which in any event will need to be adjusted to deal with the current crisis and its aftermath".

Markets will need to watch the tensions between the hard-pressed south of the Eurozone and the financially stronger members. Recovery from the collapse of economic output currently underway will require more flexibility over domestic government budgets than the strict budget rules allow – and will require some movement on common financing.

Meanwhile the precedent has been set by the virus that sometimes border movements need to be restricted. The EU battled to keep the restrictions to ones on the movement of people, but some countries also sought to limit exports of some essential medical goods. The EU itself is now calling for more essential goods to be made in the EU as a whole, at the same time as talking of its global outlook.

Many companies and sectors need more reassurances about the lifting of the restrictions and access to cash in the meantime. Until we have that, it is best to concentrate on those businesses and areas of economic life that can do well even in these difficult times. The US, Japan, the UK and the Eurozone are all suffering from the same pandemic recession, but the US is producing the most vigorous offsetting policies – and has the large technology corporates that can do well despite the disaster.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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