By John Chalmers
BRUSSELS (Reuters) – As the contagion from the coronavirus pandemic wrecks the global economy, Western policymakers are struggling to find a consensus on how best to contain the crisis as financial markets crumble.
While governments have agreed to ditch decades of fiscal orthodoxy to flood their economies with cash, arguments over how the vast sums of money should be spent are stalling measures to prevent a global recession becoming a debilitating slump.
The U.S. Federal Reserve unveiled a major expansion of its lending programs on Monday, ramping up efforts to shield the world’s largest economy after party politicking stymied efforts to get a $1 trillion plus rescue package through the U.S. Senate on Sunday.
Across Europe, policymakers have deployed a raft of measures, collectively pledging hundreds of billions of euros to cut taxes and extend unemployment benefits as businesses shut their doors and lay off thousands of people.
The European Union’s executive, for example, has expedited reviews of state aid schemes in a record two to three days to provide liquidity to small- and medium-sized businesses across the 27-country bloc.
The European Commission will present a tool for the euro zone’s bailout fund – the European Stability Mechanism (ESM) – which has 410 billion euros ($438 billion) of idle lending muscle. That could unlock unlimited purchases of sovereign debt by the European Central Bank.
But the idea of issuing EU eurobonds – debt backed by all members states – to raise more cash is still too much to stomach for some richer countries and hopes for a breakthrough at a virtual gathering of EU finance ministers on Monday are slim.
Spanish Prime Minister Pedro Sanchez, whose country is struggling with Europe’s second-worst outbreak of the COVID-19 disease after Italy, says much more is needed.
“We are at war,” he said on Sunday, calling on Europe to launch a massive, coordinated public investment program akin to the post World War Two Marshall Plan.
However, diplomats say Germany and the Netherlands, which have large budget surpluses and falling debt levels, are wary of pooling risk with weaker EU economies, some still emerging from the fallout from the financial crisis nearly a decade earlier.
“Swift implementation is of the essence, given the lingering level of stress in the markets,” AXA Group Chief Economist Gilles Moec said.
‘OVER THE CLIFF’
In Washington, there is similar wrangling over how exactly “helicopter bailouts” should be spent even as some central bankers call for massive state support with no strings attached just to keep the U.S. economy on life support.
St. Louis Federal Reserve President James Bullard told Reuters that governments should match any lost wages and lost business, no questions asked.
In the week before last, the number of Americans filing for unemployment benefits surged by the most since 2012 to a 2-1/2-year high as companies in service sectors laid off workers.
Chris Rupkey, chief economist at MUFG in New York, said the data provided confirmation, if it was needed, that the economy had already “fallen over the cliff”.
In D.C., the Senate was working to overcome differences on a coronavirus rescue package. Democrats are holding out for more money to help state and local governments and hospitals, while Republicans want quick action to give financial markets a sign of encouragement.
Eurasia U.S. Director Todd Mariano said the politicking over giveaways is likely to delay the bill by only a day or two.
“The daily freezing of economic activity due to the pandemic’s spread will subsume those concerns for now in the face of the overriding need to protect the U.S. economy,” he said. “Another expected day of market downturn and turbulence will probably help underscore that need.”
(Editing by David Clarke and Carmel Crimmins)
