Europe is headed in to a significant economic downturn of up to -3% per month due to the Coronavirus pandemic, Poul Thomsen, Director of the European Department at the IMF, said Monday (March 30) in Washington, DC.
“The recession is going to be bad. We don’t know how bad, but it will be bad. Look, the strategy here is to deliberately shut down big segments of the economy as a way of coming to grips with this crisis. These shutdowns are not accidents, it’s a deliberate act.
And we are shutting down non-essential sectors that account for one-third of GDP. That means every month that this shutdown continues, there will be at least a loss of 3 percent of GDP just in those sectors. Then there are the wider implications on the wider economy.”
Asked whether the response of European policymakers has been sufficient, Thomsen argued that they are pulling out all the stops during a time when it is clearly necessary.
“I think the policy reactions of European policymakers are very strong. As far as the financial sector and monetary policy is concerned, we have huge asset purchases. This is very welcome. And the regulators are allowing banks to use the buffers, so-called countercyclical buffers, that they built up during the good years. If there ever was a time to use that, this obviously now.”
Pouring money into the system in Europe would help to prevent long-term job losses, an impairment of the financial sector, and help with a speedy recovery, Thomsen said.
“We know from past crises: The problem is that if somebody loses its job for a long time, they lose skills and have difficulty coming back into the labor market. We know if non-performing loans are allowed to build up on a large scale, it impairs households and banks and financial institutions’ balance sheets and that will be a drag on the recovery also.
So, putting all this money into the system, and reduce the risk of non-performing loans, reduce the risk of layoffs, is really going to help the recovery gain speed once the medical crisis is under control.”
Thomsen voiced the IMF’s confidence that European leaders are doing enough to counter the economic effects of the COVID-19 pandemic.
“Debt levels are not a concern here. We need to be sure that we inject sufficient money to contain the crisis. All European countries have the fiscal space to react powerfully. “
Thomsen emphasized that the main effort of the IMF is to help smaller Central and Eastern European economies outside of the EU. They have limited access to external capital and smaller and less developed banking systems, which will in turn make it more difficult to finance large decreases in their fiscal deficits.
“The part of Europe that we should focus on first and foremost are the smaller economies in Central and Eastern Europe outside the EU. They don’t have the deep financial markets and the linkages to the EU that are important for the policy space, for their ability to react forcefully.
And actually, more than half of these countries have already approached us for emergency assistance. So, we are an important vehicle for ensuring that these countries have the necessary fiscal space so that they can also react in an appropriate way to the crisis.”
You can read Poul Thomsen’s Blogpost here: https://blogs.imf.org/2020/03/30/europes-covid-19-crisis-and-the-funds-response/