Euro area’s record slump adds urgency to calls for fiscal aid

Bloomberg

The euro-area economy plunged into a record contraction, an outcome that will only add more urgency to controversial demands for joint European fiscal support.
Output in the 19-country region shrank 3.8%, reflecting shutdowns to contain the coronavirus that have pushed businesses close to collapse, sent unemployment surging and forced governments to unleash billions of euros in emergency stimulus.
As the health crisis has morphed into an economic catastrophe, France and Spain have called for a solution that would see the burden of fiscal support shared through joint European Union debt sales. Governments such as Germany and the Netherlands have rejected that over fears they’ll end up with much of the bill.
More aid might come first from the European Central Bank, when President Christine Lagarde and her colleagues decide later on Thursday whether their planned asset purchases of more than 1 trillion euros ($1.1 trillion) this year are enough to assist the economies in need.
Most economists predict the Governing Council will pause to see whether governments can agree on comprehensive fiscal support. A minority including Goldman Sachs, however, expect a bump up in monetary stimulus immediately.
While national responses from governments — from loans to bailouts — have been huge, the lack of a coordinated spending creates a risk of an uneven recovery, widening existing economic divisions in the bloc.
Investors have put Italy in focus because of its already strained finances, and Fitch surprisingly downgraded its credit rating to one level above junk this week. However, the impact on Italian bonds has been limited because of ECB support.
Concern has mounted amid daily reports of dire economic numbers, as well as stories of companies near collapse and workers fearing for their livelihoods. Germany on Thursday reported a record 373,000 surge in jobless claims in April.
With the airline industry particularly hit, Airbus SE Chief Executive Officer Guillaume Faury has warned of the “gravest crisis the aerospace industry has ever known.” Germany’s Deutsche Lufthansa AG is seeking government aid, and British Airways Plc this week said it would cut as many as 12,000 jobs.
The latest GDP figures highlight the dramatic effect of the government-ordered shutdowns as just two weeks of closures and restrictions were sufficient to snuff out growth for the entire quarter. Worse is likely to come in the second quarter, as restrictions have been extended into May.
Globally, the virus outbreak has pushed economies into a tumult that was unthinkable at the start of the year. China’s output shrank for the first time in decades in the first quarter and the US saw its record expansion come to an end. The IMF expects the global economy to contract 3% this year, with the euro area dropping 7.5 percent.
European governments are starting to ease restrictions in an effort to get their economies back to normal. There have been signs of a pickup in activity as some factories reopen. Electricity use in the European Union rose for the first time in eight weeks.
Even as confinement eases, lasting economic damage is likely with many small companies going out of businesses, and consumers worried about both job prospects and health less likely to spend.