COVID-19 SPECIAL: News analysis

Europe struggles to breathe life into economy battered by virus

EU states argue over details of unprecedentedly huge financial package to ward off worst decline since WWII

The European Union faces a critical few weeks, as governments of its 27 member states continue to argue over the details of an unprecedentedly large financial aid package designed to save the continent from what could be its worst economic decline since World War II.

But while chances are high that the European recovery plan will soon be approved and become operational, much of the firefighting against economic recession needs to be done at a national level in individual states.

Dr Ursula von der Leyen, the president of the European Commission, the EU's executive body, is certainly thinking big; her proposal, branded as "Next Generation EU" calls for the creation of a €750 billion (S$ 1.2 trillion) fund, using borrowed money, to be repaid over a period of 30 years.

Up to €500 billion of this will be distributed to EU countries as grants, with the rest being made available in loans. And that is on top of the regular EU operational budget, which proposes to spend around €1.1 trillion in the next seven-year cycle.

"This is a completely new concept and a new step forward... The crisis is so huge, we have to take unusual steps," Dr von der Leyen told European parliamentarians last week.

But although the figures look impressive, the total fund still amounts to less than 1 per cent of the combined EU gross domestic product (GDP), so is unlikely to provide Europe's salvation.

Nobody knows how the funds are to be allocated; the money could either be allocated to countries, or to sectors of the European economy currently under stress.

And, as critics of the scheme point out, the EU-wide spending plan does not address Europe's fundamental problems, which are a lack of international competitiveness and an inability to retrain the workforce fast enough to cope with changed economic circumstances.

Indeed, to boost its grant programme, the European Commission has cut the funding available for research and innovation.

The fight for Europe's economic recovery will, therefore, still be fought in the capitals of the individual EU states.

Although the EU member states have each unveiled at least three national budgets since the coronavirus pandemic started, only to see each one overtaken by events, no consensus has emerged on what needs to be done.

A social distancing notice at an open-air market in London as England eased its rules over public gatherings and other activities. PHOTOS: EPA-EFE Shooting of a film resumed in the Montmartre district of Paris yesterday as France lifted many of its l
Shooting of a film resumed in the Montmartre district of Paris yesterday as France lifted many of its lockdown measures. PHOTO: EPA-EFE
A social distancing notice at an open-air market in London as England eased its rules over public gatherings and other activities. PHOTOS: EPA-EFE Shooting of a film resumed in the Montmartre district of Paris yesterday as France lifted many of its l
A social distancing notice at an open-air market in London as England eased its rules over public gatherings and other activities. PHOTO: EPA-EFE
  • EU finances in tatters due to impact of coronavirus curbs

  • The finances of Europe's main cities have required special attention during this crisis.

    • Paris, which alone accounts for a third of France's economic output, has seen its budget deficit rise by 50 per cent to a total of €6 billion (S$9.4 billion). Mayor Anne Hidalgo blames the central government for her financial woes. But ministers have little interest in bailing her out; Ms Hidalgo, who faces re-election this year, belongs to the Socialist party now in opposition, and is no political friend of President Emmanuel Macron.

    • London's Mayor Sadiq Khan is also not doing well. Last month, he had to beg his government to bail out the British capital's underground transport system, which is scheduled to lose an estimated £4 billion (S$7 billion) this year as a result of reduced traffic because of the pandemic. The government duly provided some funding, but only after forcing the mayor to eliminate some of the popular transport fare reductions which Mr Khan offered as part of his re-election campaign.

    • Berlin is, however, faring better. The German capital has finally managed to open its new airport, almost a decade later than initially scheduled, with vast costs overruns. But given the pandemic, the airport remains largely empty. Its big display panels flash only one announcement: "Wash your hands".

    Jonathan Eyal

Unemployment is a key problem in every European nation but is particularly marked in the poorer southern European countries.

In Spain, for instance, the number of those jobless is projected to rise from 14 per cent last year to around 20 per cent of the labour force by year's end. In Italy, the jobless rate may stand at 13 per cent by December, while in Greece, up to a quarter of the labour force may end up unemployed.

The key reasons for these disparities are that the southern European states were already weakened by previous financial crises and are more affected by the pandemic which has destroyed tourism income, a key revenue source for them.

Britain and France are planning for a 10 per cent unemployment rate, more than last year, but still manageable.

But the responses in each European country could not be more different. Spain is concentrating more on helping the poorest 2.3 million of its citizens by creating a so-called minimum income guarantee for each poor household, a top-up social welfare fund for each qualifying family.

The government in Italy seems more interested in taking back under state control strategic assets such as stock markets or financial trading platforms to ensure ministers have the necessary powers to tackle the crisis.

However, neither the Spanish nor Italian measures seem designed to tackle the unemployment figures.

Meanwhile, in Britain, officials estimate that up to a tenth of the £40 billion (S$70 billion) worth of emergency loans offered to businesses will never be repaid, as bankruptcies mount. The government is also planning to roll out a £100 billion job creation plan, as well as a raft of infrastructure spending proposals to kick-start the economy.

Borrowing is set to soar; the European Central Bank has said budget deficits across Europe will average 8 per cent of GDP, almost double the level permitted by treaties between countries operating the euro.

All eyes are on Germany, Europe's biggest economy, which shrank by 2.2 per cent in the first quarter of this year.

Chancellor Angela Merkel asked Parliament in March to suspend a constitutional provision - which barred her government from running deficits - in order to finance a huge national rescue package that includes unlimited credit schemes to small and medium-sized companies.

The rest of Europe hopes that Germany's sudden conversion from a frugal to a spending nation will continue. For that's the continent's best hope of lifting itself from the doldrums.

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A version of this article appeared in the print edition of The Straits Times on June 02, 2020, with the headline Europe struggles to breathe life into economy battered by virus. Subscribe