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European Slump Is Worst Since World War II, Reports Show European Slump Is Worst Since World War II, Reports Show
(about 1 hour later)
FRANKFURT — Europe is in the midst of a downturn not seen since the end of World War II, and the worst is yet to come, Europe’s top central banker said Thursday as she painted a scenario that will test how far the continent’s political leaders are willing to go to preserve their fractured union.FRANKFURT — Europe is in the midst of a downturn not seen since the end of World War II, and the worst is yet to come, Europe’s top central banker said Thursday as she painted a scenario that will test how far the continent’s political leaders are willing to go to preserve their fractured union.
“The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime,” Christine Lagarde, the president of the European Central Bank, said as she warned that the eurozone economy could shrink by as much as 12 percent this year.“The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime,” Christine Lagarde, the president of the European Central Bank, said as she warned that the eurozone economy could shrink by as much as 12 percent this year.
In a bid to prevent another financial crisis that would generate years of economic woe, the bank’s Governing Council decided Thursday to effectively pay banks to lend money and vowed to do whatever was necessary to counteract the economic impact of the coronavirus pandemic.In a bid to prevent another financial crisis that would generate years of economic woe, the bank’s Governing Council decided Thursday to effectively pay banks to lend money and vowed to do whatever was necessary to counteract the economic impact of the coronavirus pandemic.
But many economists and government leaders agree that despite the central bank’s display of monetary firepower, which could pump more than $4 trillion into the economy, it will not be enough to guarantee the survival of the eurozone without help from governments.But many economists and government leaders agree that despite the central bank’s display of monetary firepower, which could pump more than $4 trillion into the economy, it will not be enough to guarantee the survival of the eurozone without help from governments.
“Europe is experiencing an economic shock without precedent in modern times,” said Paolo Gentiloni, the European commissioner for the economy and a former Italian prime minister. “This is why we need a recovery plan that is sufficiently large, targeted at the hardest-hit economies and sectors, and deployable in the coming months.”“Europe is experiencing an economic shock without precedent in modern times,” said Paolo Gentiloni, the European commissioner for the economy and a former Italian prime minister. “This is why we need a recovery plan that is sufficiently large, targeted at the hardest-hit economies and sectors, and deployable in the coming months.”
“If not now, when?” he added.“If not now, when?” he added.
Ms. Lagarde urged European leaders to go beyond the relatively modest sums they have already pledged and “to work towards establishing a recovery fund dedicated to dealing with this unprecedented crisis.”Ms. Lagarde urged European leaders to go beyond the relatively modest sums they have already pledged and “to work towards establishing a recovery fund dedicated to dealing with this unprecedented crisis.”
Her stark assessment of the economic impact of the coronavirus crisis came after the European Union’s statistics agency estimated that economic output in the eurozone fell 3.8 percent in the first three months of the year, the region’s worst performance since the common currency was introduced in 1999.Her stark assessment of the economic impact of the coronavirus crisis came after the European Union’s statistics agency estimated that economic output in the eurozone fell 3.8 percent in the first three months of the year, the region’s worst performance since the common currency was introduced in 1999.
The French economy declined by 5.8 percent, Spain’s by 5.2 percent and Italy’s by 4.7 percent, their steepest downturns in the postwar period.The French economy declined by 5.8 percent, Spain’s by 5.2 percent and Italy’s by 4.7 percent, their steepest downturns in the postwar period.
But divided European Union leaders have struggled to assemble the type of enormous stimulus plan urged by Mr. Gentiloni and others.But divided European Union leaders have struggled to assemble the type of enormous stimulus plan urged by Mr. Gentiloni and others.
The leaders in Brussels have not been able to agree on what would have been the most ambitious response to the crisis, issuing common debt that would be guaranteed by all countries. They instead have settled on policies that will support unemployed workers, small businesses and health care systems with 540 billion euros, or $590 billion, an underwhelming sum considering the scale of the recession ahead.The leaders in Brussels have not been able to agree on what would have been the most ambitious response to the crisis, issuing common debt that would be guaranteed by all countries. They instead have settled on policies that will support unemployed workers, small businesses and health care systems with 540 billion euros, or $590 billion, an underwhelming sum considering the scale of the recession ahead.
Italy and Spain, both hard hit by the virus, have been leading a bloc of weaker European countries that are demanding a fund worth at least 1.5 trillion euros to help the region recover. Italy and Spain, both hard hit by the virus, have been leading a bloc of weaker European countries that are demanding a fund worth at least €1.5 trillion to help the region recover.
But European Union leaders have fallen back into familiar camps. Germany, the Netherlands and other wealthier northern countries have insisted that the poorer countries in the south finance their own recoveries — ignoring, critics say, the degree to which their economic fates are intertwined.But European Union leaders have fallen back into familiar camps. Germany, the Netherlands and other wealthier northern countries have insisted that the poorer countries in the south finance their own recoveries — ignoring, critics say, the degree to which their economic fates are intertwined.
Italy is a major supplier of parts for German cars, but its heavy debt load could provoke a financial crisis that would be devastating for the continent. The burden of dealing with coronavirus is expected to push Italy’s government borrowing above 150 percent of gross domestic product, a perilously high level. If investors lose faith in Italy’s ability to service its debt and dump Italian bonds, German banks would be among those hit hard. Italy is a major supplier of parts for German cars, but its heavy debt load could provoke a financial crisis that would be devastating for the continent. The burden of dealing with the coronavirus is expected to push Italy’s government borrowing above 150 percent of gross domestic product, a perilously high level. If investors lose faith in Italy’s ability to service its debt and dump Italian bonds, German banks will be among those hit hard.
As was the case during the last eurozone crisis, which ended only five years ago, the central bank would be left to pick up the pieces as best it can. As was the case during the last eurozone crisis, which ended only five years ago, the central bank would be left to pick up the pieces as best it could.
“If, as we expect, the countries do not come to an agreement in the foreseeable future," Jörg Krämer, the chief economist at Commerzbank, said in a note to clients, “pressure will quickly mount again on the bond markets, which should prompt the E.C.B. to step in.” “If, as we expect, the countries do not come to an agreement in the foreseeable future,” Jörg Krämer, the chief economist at Commerzbank, said in a note to clients, “pressure will quickly mount again on the bond markets, which should prompt the E.C.B. to step in.”
The central bank did not change any of its official interest rates Thursday, but in effect it lowered its main lending rate below zero.The central bank did not change any of its official interest rates Thursday, but in effect it lowered its main lending rate below zero.
Under certain conditions, the central bank will allow commercial banks in the eurozone to borrow at a rate of minus 1 percent provided the money is passed on to businesses and consumers. And under a program with fewer strings attached, banks will be able to borrow as much as they want from the central bank at a negative rate of 0.25 percent.Under certain conditions, the central bank will allow commercial banks in the eurozone to borrow at a rate of minus 1 percent provided the money is passed on to businesses and consumers. And under a program with fewer strings attached, banks will be able to borrow as much as they want from the central bank at a negative rate of 0.25 percent.
The negative interest rates mean that banks could borrow up to 3 trillion euros, or $3.3 trillion, without having to pay all of the money back. The negative interest rates mean that banks could borrow up to €3 trillion, or $3.3 trillion, without having to pay all of the money back.
The central bank also said that it was prepared to further increase its purchases of government and corporate bonds, a form of money printing intended to keep market interest rates low and make it easier for businesses and consumers to get credit. The central bank also said it was prepared to further increase its purchases of government and corporate bonds, a form of money printing intended to keep market interest rates low and make it easier for businesses and consumers to get credit.
The central bank had previously earmarked more than €1 trillion, or $1.1 trillion, for asset purchases. But the bank said Thursday it was prepared to raise that sum “as much as necessary and for as long as needed.” The central bank had previously earmarked more than €1 trillion, or $1.1 trillion, for asset purchases. But the bank said Thursday that it was prepared to raise that sum “as much as necessary and for as long as needed.”
“We are fully flexible and we will look at all options,” Ms. Lagarde said. “We are fully flexible, and we will look at all options,” Ms. Lagarde said.
As bad as the data published Thursday looked, the next quarter could be even worse. Lockdowns did not begin until March, near the end of the three-month period covered by the report. Ms. Lagarde said that eurozone output could decline by 15 percent in the second quarter. As bad as the data published Thursday looked, the current quarter could be even worse. Lockdowns did not begin until March, near the end of the three-month period covered by the report. Ms. Lagarde said eurozone output could decline by 15 percent in the second quarter.
“Sectors of the economy are simply shut down,” she said.“Sectors of the economy are simply shut down,” she said.
The economy is expected to rebound later in the year, Ms. Lagarde said, but the total decline for 2020 will be at least 5 percent and as much as 12 percent.The economy is expected to rebound later in the year, Ms. Lagarde said, but the total decline for 2020 will be at least 5 percent and as much as 12 percent.
Official data published Thursday is only beginning to reveal the scale of the damage caused by shutdowns to prevent the spread of coronavirus.Official data published Thursday is only beginning to reveal the scale of the damage caused by shutdowns to prevent the spread of coronavirus.
Unemployment in the eurozone rose modestly in March, to 7.4 percent from 7.3 percent in February, interrupting a jobs recovery that had been underway since the low point of the eurozone debt crisis in 2013.Unemployment in the eurozone rose modestly in March, to 7.4 percent from 7.3 percent in February, interrupting a jobs recovery that had been underway since the low point of the eurozone debt crisis in 2013.
In France, Germany and many other countries, millions of employees are on government-subsidized furloughs and do not count as unemployed. Germany’s unemployment rate rose to 5.8 percent from 5.1 percent in March. Although 2.6 million Germans are officially unemployed, more than 10 million are furloughed.In France, Germany and many other countries, millions of employees are on government-subsidized furloughs and do not count as unemployed. Germany’s unemployment rate rose to 5.8 percent from 5.1 percent in March. Although 2.6 million Germans are officially unemployed, more than 10 million are furloughed.
The jobless rate is almost certain to rise further as airlines, carmakers and other large corporations begin to lay off workers in reaction to plunging sales.The jobless rate is almost certain to rise further as airlines, carmakers and other large corporations begin to lay off workers in reaction to plunging sales.
Inflation in the eurozone, another indicator of distress, fell to an annualized rate of 0.4 percent in April from 0.7 percent in March as oil prices plunged. The rate is the lowest since 2016. However, prices for food, alcohol and tobacco surged.Inflation in the eurozone, another indicator of distress, fell to an annualized rate of 0.4 percent in April from 0.7 percent in March as oil prices plunged. The rate is the lowest since 2016. However, prices for food, alcohol and tobacco surged.
Ms. Lagarde declined to speculate on whether the eurozone was in danger of slipping into deflation, a ruinous downward spiral of prices and demand.Ms. Lagarde declined to speculate on whether the eurozone was in danger of slipping into deflation, a ruinous downward spiral of prices and demand.