September 30, 2020

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Europe’s Economic Revival Is Imperiled, Raising the Specter of a Grinding Downturn

7 min read

LONDON — Europe was supposedly done with political histrionics. In the face of the pandemic, a continent not known for common purpose had put aside long-festering national suspicions to forge a collective economic rescue, raising hopes that a sustainable recovery was underway.

But the European revival appears to be already flagging, and in part because of worries that traditional political concerns may disrupt economic imperatives.

The European Central Bank — which won confidence with vows to do whatever it took to stabilize the economy and support lending — has been hesitant to reprise such talk, sowing doubts about the future availability of credit.

National governments that have spent with abandon to subsidize wages and limit layoffs are wrapping up those efforts, presaging a surge of joblessness.

And in the midst of the worst public health emergency in a century, twinned with the most severe economic downturn since the Great Depression, the British government has opted to unleash a fresh crisis: It has sharply escalated fears that it may follow through with years of bellicose threats to abandon Europe without a deal governing future commercial relations across the English Channel.

A chaotic Brexit would almost certainly worsen Britain’s already terrible economic downturn while also assailing major European trading partners like the Netherlands, France and Spain.

Collectively, these developments have crystallized fresh worries that Europe could find itself mired in bleak economic circumstances for many months, especially as the virus regains strength, yielding an alarming increase of cases in Spain, France, and Britain.

“It’s hard to imagine a recovery that’s going to be strong and sustained given the current situation,” said Ángel Talavera, lead eurozone economist at Oxford Economics in London. “There’s not a lot of engines of growth.”

A new Oxford Economics tracking model shows that commercial life in the 19 nations that share the euro currency bounced back sharply in July and much of August, before activity slowed again in recent weeks.

But as Covid cases have increased in recent weeks, consumers and businesses have altered their own behavior, even where governments have loosened restrictions. People have scrapped holidays, limited their exposure to shopping areas, and opted to economize in the face of threats to businesses and jobs.

The results reinforce what has become a truism of the pandemic: The fundamental threat to economic livelihood is the virus itself. The lockdowns have simply intensified the effect.

“It’s hard to anticipate that consumers are going to be driving much of a recovery without the health situation under control,” Mr. Talavera said.

That was the backdrop as the European Central Bank convened last week amid deepening worries about flagging growth, which raised the prospect of deflation — falling prices, which discourage investment and choke off future growth. Exporters were troubled by increases in the value of the euro, which makes European goods more expensive on world markets.

Some analysts hoped to hear reassuring words of action from the bank’s president, Christine Lagarde.

In the first phase of the pandemic, she unleashed an overwhelming surge of money into the economy, banishing fears of a shortage of credit. In mid-March, the bank promised to spend up to 750 billion euros ($892 billion) to purchase government and corporate bonds. By June, the central bank had nearly doubled that target. Along the way, Ms. Lagarde won plaudits for assuaging the darkest imaginations of a marketplace grappling with an unfamiliar emergency.

Ms. Lagarde reportedly played a behind-the-scenes role in bringing to fruition a landmark development in the history of the European Union — an agreement to forge a $750 billion euro rescue fund, with much of the money raised through the sale of bonds backed collectively by member nations.

In previous emergencies, northern European countries — especially Germany, the Netherlands and Finland — had opposed putting their taxpayer money on the line to cover the shortfalls of their southern European brethren while indulging crude stereotypes about the supposedly profligate ways of the Mediterranean.

Such episodes had revealed Europe to be a union in name only — a reality that tended to enhance trouble, prompting investors to demand higher rates of return for loans to Spain, Portugal and Italy, lifting borrowing rates for those countries.

But the passage of the coronabond proposal — which was championed by France and Germany — cemented the sense that the pandemic had brought about a maturation of the bloc.

“The rich countries have shown they are willing to put their credibility on the line to support the others,” said Christian Odendahl, the Berlin-based chief economist at the Center for European Reform. “That will stabilize expectations about the European economy going forward.”

But he was struck by Lagarde’s reticence in pledging further action last week. “I would have expected her to be a bit more aggressive, and say, ‘OK, if this continues, we will need to do more,’” Mr. Odendahl said.

Instead, her silence generated the impression that the European Central Bank — as ever, balanced between the fiscally conservative inclinations of the north, and the debt-saturated nations of the south — was prioritizing the protection of consensus over decisive action.

The greatest cause for concern centers on what has not changed in Europe: Both the euro and the broader European Union are governed by strict rules limiting the allowable size of budget deficits.

Those rules have been suspended, permitting member nations to borrow aggressively to finance their job protection programs. But the strictures will return eventually, forcing spending cuts. Already, member nations are debating how long they can extend the relief. Companies are resorting to layoffs.

Joblessness rose within the eurozone to 7.9 percent in July, marking its fourth straight month of increases, according to the Organization for Economic Cooperation and Development in Paris.

“Unemployment is exploding, and probably will be exploding everywhere between now and the end of 2020,” said Amandine Crespy, a political scientist at the Institute for European Studies at the Free University of Brussels. “All the lights are red.”

France typifies the concern. As the country tumbled into a deep recession early this year, President Emmanuel Macron delivered a massive 600 billion euro ($711 billion) package of spending measures to stimulate a recovery.

About 500 billion euros was dispensed to troubled companies via tax cuts, subsidies and state-backed loans. More than one million private-sector workers in industries ranging from restaurants to aerospace have been promised an additional year of wage subsidies.

All told, the government is covering 90 percent of the French economy’s coronavirus-related losses, said Patrick Artus, chief economist at the French bank Natixis and an economic adviser to Mr. Macron’s government.

An economic plunge that had been forecast to reach 10.3 percent this year has been moderated to 8.7 percent, the Banque de France said on Monday.

But some economists, who say more support is needed, worry that a new 100 billion euro “turnaround plan” announced last week by Mr. Macron’s government will fall far short of generating a revival.

The program largely focuses on longer-term investments over the next decade in green industries like electric car batteries and hydrogen power. It comes as Green Party candidates are sweeping into power in major French cities, prompting Mr. Macron’s government to shift toward more ecological policies.

About a third of the money would subsidize corporate tax cuts to stimulate long-term investment. The government is betting that if it can instill confidence that a brighter future is unfolding, French savers will invest in forward-looking industries and generate jobs.

Economists affirm the logic, but fret that the benefits could take too long to emerge.

“The ambition is there,” Charlotte de Montpellier, an economist at ING Bank, said in a note to clients. “But the realization could turn out to be more complicated than expected.”

As if none of this were enough, Prime Minister Boris Johnson of Britain — his popularity plummeting following his government’s tragic mishandling of the first phase of the pandemic — has taken this as the moment to embrace rogue tactics in negotiating a trade deal with the European Union.

He has advanced a bill that renounces commitments Britain has already made to the European bloc in a delicate maneuver to prevent the re-imposition of a border separating Northern Ireland — part of the United Kingdom — from the independent Republic of Ireland.

Former prime ministers and members of his own Conservative Party have assailed the move as a violation of international law, its mere formulation undermining the nation’s standing as a credible member of the world community.

Mr. Johnson’s action has poisoned dealings with Europe, significantly increasing the chance that Britain will crash out of the bloc without a deal when an official transition period expires at the end of this year. Such an outcome could bring unquantifiable amounts of chaos upon the ports on both sides of the English Channel.

Given that Britain sends nearly half of its exports to the European bloc, an unruly Brexit would almost certainly exacerbate the perilous straits gripping the nation’s economy, which contracted by more than 20 percent between April and June. Europe stands to be hurt, too.

“It comes at a bad time,” said Mr. Odendahl. “Neither for Britain nor for the E.U. do you necessarily need disruption to your trade relationship while trying to keep your economy afloat during a pandemic.”

Peter S. Goodman reported from London and Liz Alderman from Paris.

Peter S. Goodman and Liz Alderman


2020-09-17 00:28:09


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