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World & Nation

With European economy in record slump, central bank gives aid

A man walks in front of the European Central Bank in Frankfurt, Germany
A man crosses the Main River on a bridge near the European Central Bank in Frankfurt, Germany. The European economy shrank by 3.8% in the first quarter, the most since records began being kept.
(Michael Probst / Associated Press)

The European Central Bank is stepping up its efforts to cushion the economy against a record downturn that the bank’s president, Christine Lagarde, said was “of a magnitude and speed that are unprecedented in peacetime.”

The monetary authority for the 19 countries that use the euro currency on Thursday lowered the interest rate on the cheap, long term loans it provides to banks. It also offered a raft of new credit lines to banks at a quarter of a percentage point below its main interest benchmark, which is zero.

The idea is to support banks so they can keep lending to businesses, thereby supporting the economy, which contracted by a record 3.8% in the first three months of the year from the quarter before, according to official figures released Thursday. That decline is the biggest since records began being kept in 1995 and worse than the drop in 2009 during the Great Recession that followed the bankruptcy of U.S. investment bank Lehman Bros.

“Measures to contain the spread of the coronavirus, COVID-19, have largely halted economic activity in all the countries of the euro area and across the globe,” Lagarde told an empty press room at the ECB’s headquarters in Frankfurt after a meeting conducted by teleconference among members of its rate-setting council.

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While Europe’s economic activity is plunging amid the massive shutdowns that idled everything from florists to factories, the labor market is holding up thanks to generous government support. Unemployment rose only slightly in March, to 7.4% from 7.3% in February, statistics agency Eurostat said. Millions of workers are being supported by temporary short-hours programs under which governments pay most of their salaries in return for companies agreeing not to lay people off.

U.S. unemployment rose to 4.4% in March from 3.5% in February, though the eventual picture is likely far worse. First-time claims for unemployment benefits have skyrocketed in the U.S. as 30 million people applied through the first three weeks of April.

The statistics in Europe likely understate the depth of the fall since shutdown measures were mostly put in place only in March, the last of the three months in the quarter.

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Figures from France and Italy showed both countries fell into recession, defined as two consecutive quarters of economic contraction. The French economy shrank 5.8%, the most since the country’s statistics agency began keeping records in 1949. The drop was particularly pronounced in services that involve face-to-face interaction, such as hotels and restaurants, retail stores, transportation and construction.

The new central bank measures come on top of already announced stimulus efforts that include an ongoing $825 billion in bond purchases. Those purchases help drive down borrowing rates for companies and governments. In particular, they have kept a lid on financing costs for heavily indebted Italy, one of the countries hardest hit by the outbreak. The bank did not cut its interest benchmarks, although the new credit offers amount to the same thing, since they lower the cost to banks of borrowing from the central bank.

Europeans are starting to venture outside after weeks of pandemic-related confinement, but the rules look different in Madrid than they do in Berlin.

The ECB did not change the amount of the bond purchases but said it was “fully prepared” to increase their size “by as much as necessary and for as long as needed.” Central bank purchases of government bonds are a key stabilizer for the eurozone since governments will be borrowing heavily to pay for stimulus and because of falling tax receipts due to the virus outbreak.

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The bank has also eased requirements for bank capital cushions, relief that means banks are not pressed to restrict lending in order to shore up their own finances. The central bank also made it easier for banks to tap cheap credit directly from the central bank by loosening collateral requirements.

The bank had already lowered its key interest rate benchmarks to record lows before the virus outbreak during a period of sub-par growth in Europe.


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