Coronavirus economics: Governments wage unprecedented war

Coronavirus economics: Governments wage unprecedented war

Wednesday, March 25, 2020

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LONDON, United Kingdom (AFP) — Governments around the world are resorting to the unthinkable in economic policy as they battle to immunise growth from deeper coronavirus carnage.

Gargantuan debt spending, printing of money, loan guarantees, tax breaks and even direct payments to workers are all in the highly unorthodox mix.

AFPsurveys the latest responses by major economies as COVID-19 has spread from China to infect the rest of the world, making a global recession all but inevitable:

BREAKING TABOOS

Germany, the European Union's toughest fiscal hardliner, now recognises that extraordinary times call for extraordinary measures.

On Monday, Berlin said it would abandon its constitutional debt limits and raise 156 billion euros (US$168 billion) in new borrowing in a bid to stop Europe's largest economy from going under.

A few weeks ago, Britain was anticipating a free-market future outside the EU but it is now resorting to levels of State intervention unseen since World War II.

The Government rolled out a series of extra measures on Friday, including direct grants to cover up to 80 per cent of the wages of employees who have been temporarily laid off, as it ordered cafes, pubs and restaurants to close entirely.

France, which is already on lockdown, is vowing to let no company go under as it too embarks on a massive programme of intervention to safeguard jobs.

Clearing the way, the EU has suspended limits on members' debt and deficit levels.

That is a particular relief to Italy, which has overtaken China to register the most deaths from COVID-19.

Backed by France, Italy wants the EU to breach the ultimate taboo by allowing Eurozone members to pool their debts and issue so-called coronabonds.

Germany — which fiercely opposed such a radical step during the Eurozone debt crisis — is now not ruling it out.

NOT SO FAST

While Europe vows to do whatever it takes, US lawmakers failed on Sunday to agree on a trillion US-dollar emergency package to shore up the crumbling American economy.

The package — likely the largest federal intervention in US history — would cushion the blow for households and backstop ailing businesses. It would also likely send the federal deficit soaring.

But Democrats said the plan pushed by President Donald Trump's Republicans failed adequately to protect millions of workers or the under-equipped health care system.

A separate package from US financial overseers, including the Federal Reserve, would provide a stunning US$4-trillion in liquidity to juice up the economy.

Measures agreed already include US$100 billion directed at paid sick leave and expanded unemployment benefits, which Trump signed into law last week.

CENTRAL BANKS CENTRALISE

The Fed has issued a near-daily series of announcements to reassure panic-stricken markets and keep dollars flowing, in addition to slashing its main lending rate to near zero.

On Monday, the US central bank vowed to buy unlimited amounts of government debt — akin to printing money — and offered to lend directly to small and medium-sized firms.

The European Central Bank, after being criticised for keeping interest rates on hold, last week announced a 750-billion euro scheme to buy government and corporate bonds, so circulating huge amounts of cheap cash.

The Fed and ECB have joined other central banks in enhancing currency swaps to maintain a plentiful supply of dollars running through seized-up credit markets.

MISSING IN ACTION

So far, global bodies such as the G7 and G20 have yet to forge a collective response to fight the pandemic and help poorer nations who lack the borrowing capacity of their richer peers.

Angel Gurria, secretary general of the Organisation for Economic Co-operation and Development (OECD), said at the weekend that needs to change “to avoid a protracted recession”.

He called for a “sizeable, credible, internationally coordinated effort” bigger than even the 1930s New Deal and the Marshall Plan, which rebuilt Europe after World War II.

Saudi Arabia, which holds the G20 presidency, has called for a videoconference summit of leaders this week.


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