The speed of Europe’s response has come as a surprise, especially after the infighting and procrastination that marked leaders’ response to the eurozone debt crisis that began in 2010. The euro avoided collapse then only because the European Central Bank stepped in to prevent government borrowing costs from spinning out of control. This time, the ECB and governments have been acting in concert.
“Looking at what happened in the last two weeks, this is huge,” said Carsten Brzeski, chief eurozone economist at ING Bank. “It looks as if Europe finally got the message.”
The scale of the damage inflicted by the pandemic seems to have focused political leaders’ minds and helped them to overcome the divisions and indecisiveness that hampered crisis fighting in the past. The ECB’s staff economists on Thursday forecast that the eurozone economy will slump by 9 per cent this year, and said that a deeper slump was possible.
Christine Lagarde, the central bank’s president, said Thursday that there “are some signs of a bottoming-out” in the economic decline, but “the improvement has so far been tepid”.
Economic forecasts, she said during an online news conference, are “surrounded by an exceptional degree of uncertainty.”
At least for the moment, the technocratic approach taken by leaders like Merkel, French President Emmanuel Macron and President of the European Commission Ursula von der Leyen, seems to have paid off. The rate of new coronavirus infections and deaths has dwindled in most of continental Europe, and countries have been able to start lifting their lockdowns.
Cafes in Paris are once again serving patrons outdoors. Spain, which had one of the strictest lockdowns, has allowed people to leave their homes again. Italy has lifted restrictions on domestic travel and popular tourist sites like the Leaning Tower of Pisa have reopened.
Schools across Europe are reopening, though usually with reduced hours. Stores, gyms and restaurants are operating again in Germany, although patrons are required to wear masks and practise social distancing. The government in Berlin is preparing to lift restrictions on other Europeans coming into the country on June 15.
Risks abound, and it is not out of the question that European leaders could revert to old habits. The European Commission’s €750-billion package could run into trouble as it goes through the approval process, which requires ratification by EU countries and the European Parliament.
Although Germany has changed its approach, other traditional frugal countries including Austria, Denmark, the Netherlands and Sweden have already voiced their resistance to money being paid out as grants instead of loans to be paid back, becoming known as the “frugal four”.
But Germany’s about-face on government spending illustrates how much attitudes have changed. Only a few months ago, German leaders were lecturing other European countries on the virtues of austerity. Now, they are the continent’s big spenders.
German households will receive €300 per child, pay a reduced value added tax on daily items and receive a cut in their electricity bills, under the plan announced by the German government late Wednesday.
The plan also includes €5.3 billion for the social security system, €10 billion to help municipalities cover housing and other costs and €1.9 billion for cultural institutions and nonprofit groups. It includes incentives to purchase electric vehicles, but none for gas- or diesel-fired engines, which Germany’s powerful automakers had sought.
The plan requires new borrowing. Merkel’s government abandoned its adherence to a balanced budget in March, when it passed a €750 billion rescue package that included taking on more than €150 billion of fresh debt. The latest package will also be financed by new borrowing, reflecting government concerns that millions of employees still need incentives to encourage spending.
Germany’s unemployment rate, at 3.5 per cent, is still extremely low. But one-fifth of the country’s workers are furloughed or working reduced hours because of the pandemic, with the government making up most of the lost wages. Many of those people could become officially unemployed if their employers shut down for good or reduce in size.
“We need to get out of this crisis with an oomph,” the finance minister, Olaf Scholz, said.
The New York Times