BusinessEurope Headlines No. 2020-11

EU leaders must protect the European economy, whatever it takes

Ahead of the video conference of the members of the European Council on 26 March 2020, BusinessEurope sent a letter to EU leaders underlining European businesses` determination to help overcoming the COVID-19 crisis and urging the European Council, the European Commission and the European Parliament to focus on the essential in order to avoid diverting resources away from this vital battle. The letter states that while authorities must take all the necessary steps to stop COVID-19 from spreading, it is also essential to: (1) increase flexibility and clarity of State Aid rules regarding the support beyond €800,000 that will be required for many of the larger companies affected by the crisis; (2) take all necessary steps to ensure transportation of goods across the single market are not blocked; (3) put in place a coordinated EU approach on what constitutes critical infrastructure and essential goods and services; (4) urgently develop an EU industrial conversion plan to quickly increase production of key goods, including across the entire medical supply chains; (5) ensure that international trade flows are maintained; (6) postpone non-essential EU public consultations and proposals given the need to concentrate all efforts on combating the COVID19 crisis. Read the press release and our full message.

Contact: Jasmin Ploner​

Our comment

Urgent, substantial and non-repayable support for business is the way to ensure this economic crisis is short-lived

By James Watson, Chief Economist at BusinessEurope

Even by the standards of the 2008 financial crisis, the economic policy response by governments and central banks across the globe to the present crisis has been rapid and dramatic. Within days of restrictions on personal movement and economic activity being put in place, finance ministries have acted swiftly to try and secure the business eco-systems, upon which long-term growth, prosperity and employment depend.

Within the EU, we have already seen the ECB launch a new  Pandemic Emergency Purchase Programme representing over 7% of GDP, a €37 billion “Corona Response Investment Initiative” from the European Commission, and liquidity support schemes by member states covering up to 13% of euro area GDP, according to the Eurogroup. The events of September 2008 may have been dramatic, but the financial crisis largely played out more slowly, with for example, the US Federal Reserve already providing huge emergency support to banks as far back as March 2008.

While the last crisis had at it roots the unsustainable build-up of debts in our financial system, the cause of the present crisis is not economic. The present economic crisis is a supply and confidence crisis, the result of sharply reduced demand, particularly in certain service sectors. If we can rapidly put in place, with sufficient magnitude, the measures needed to support cash-flow and demand in our economy, we can ensure that the economic impact of this crisis will be more short-lived than that of the last, and avoid this crisis turning into a financial crisis.

Ensuring that as many companies and their employees as possible survive the crisis ready to drive the recovery, means member states increasingly focussing support not only on availability of liquidity, but on non-repayable support to cover costs and to provide support to households. Many companies, particularly SMEs, however willing to take on further debt, simply cannot survive for a significant period with no revenue, but significant ongoing costs. Substantial support to cover costs incurred by businesses is therefore required if a large number of bankruptcies and a sharp increase in unemployment is to be prevented.

Some EU member states are already rolling out such schemes, particularly around facilitating short-term working or subsidising employment, but these need to be expanded, helping to cover costs such as rent and taxes. Putting such schemes in place as quickly as possible, and ensuring businesses have clarity regarding their eligibility will be key to giving businesses the confidence to retain staff and carry on long-term trading.

And whilst this support may initially be to business, it will of course find its way across the economy. Ensuring businesses stay solvent means more wages are paid, suppliers and creditors are honoured, and consumers actually get refunds for services that had to be cancelled. A stimulus through business is thus likely to be more efficient for public treasuries than broader based “helicopter money” such as transfers to individuals to increase demand.

Schemes to support businesses will need to be large if we are to avoid unnecessary bankruptcies and job losses. It is still early days to start assessing the possible short-term hit to GDP in our economies, particularly given its dependence upon both the depth and the length of the social distancing restrictions, which will in turn impact on the crucial question of to what extent we can keep industry producing. Most commentators are currently suggesting GDP falls in 2020 in the US and EU of between 5% and 10%, giving us a sense of the magnitude of the transfers which will be needed by governments.

Yes, these are large numbers, but again a comparison with the 2008 crisis is revealing. EU debt levels rose by almost 20 percentage points between 2008 and 2010, given the huge costs of not only helping sustain economic activity for a significant period, but also recapitalising banks. This time the intervention can be shorter and targeted at the real economy. Moreover, as Bruegel’s Guntram Wolff has pointed out, a large fiscal stimulus, by rapidly returning the economy to full output levels, is likely to ultimately lead to a similar debt/GDP ratio than a small boost that leads to a delayed rebound.

There is however a risk that the stimulus will be too timid in many member states. Details of the US’s $2trillion (10% of GDP) package are presently patchy, but it is clear that a significant part of the package is grants and not just liquidity support. The EU must not fall behind major trading partners in its ambitions. Direct stimulus measures by member states of 2% of GDP are already in place, according to the Eurogroup. It is however only a first step and we need to go further. The EU may have automatic fiscal stabilisers much stronger than those of the US economy, but much of this support only comes when workers are made unemployed, exactly the scenario we are trying to avoid.

Whilst much of this support needs to come from member states, it is crucial that the EU continues to play a supportive and co-ordinating role, fully using all the tools it has. The measures described above risk being significantly undermined if we are not able to keep the single market properly functioning, maintaining vital supply chains across member state borders for industry and consumers alike. The Ecofin Council has now suspended the Stability and Growth Pact rules and brought in a temporary state aid regime offering full flexibility, at least for support up to €800,000 per company (further flexibility is still required for larger support), following proposals from the Commission. So member states largely have the legal flexibility they need, and with bond yields at historically low levels, they can afford to be bold.

One final lesson from the 2008 financial crisis is that we should not need to rely on the ECB to do whatever it takes to defend our common currency. With debt levels relatively high in some member states, and the depth of the downturn still unknown, it is right that the Eurogroup is looking at further “lines of defence” for the euro. Such action can guarantee that all member states can provide the urgent and significant support to business essential to addressing this economic crisis.

Contact: James Watson

New Publication

After crisis response, reforms will be needed to return to growth trajectory

The immediate economic priority for the EU and its member states at the moment is to provide coordinated crisis response to the COVID-19 outbreak in order to maintain the essential functioning of our economy and preserve an intact business eco-system. But as we move from acute crisis management initiatives to the longer-term task of restarting growth and rebuilding our economy in the aftermath of the ongoing crisis, we will need to focus on economic and structural reforms that will unlock Europe’s economic potentials.

On 25 March BusinessEurope published its annual Reform Barometer, a publication which benchmarks the EU’s competitiveness with other major economies. It shows that the EU is lagging behind other major economies on a range of areas that are crucial to ensuring a strong and competitive economy.

Concerningly, the Reform Barometer also showed against this background that, according to our survey of member federations, the impetus for economic reform has been dented. Our member federations estimate that member states have satisfactorily implemented only 13 % of the essential reforms agreed with the EU, down from 20% last year.

Contact: Malthe Munkøe

Business calls for measures to mitigate effects of COVID-19 on supply chains

Major business organisations around the world, members of the Global Business Coalition (GBC), published a statement on 19 March calling on governments to work together to keep the global air cargo networks and the critically important goods they contain moving during the COVID-19 crisis. “Air cargo industry plays a pivotal role ensuring that time-critical shipments, whether life-saving medical supplies, urgent repair components or essential inputs into global supply chains, reach their destination in safe and timely manner”, the statement reads. It also points out that governments need to support a global standard to address the circumstances of critical employees such as cargo pilots and crew members to ensure that the networks can continue to operate. Read the full statement.

Contact: Luisa Santos

Unified Patent system must enter into operation but German decision delays it

By its decision published on 20 March 2020, the German Federal Constitutional Court has declared that the German law approving the Agreement on a Unified Patent Court (UPC Agreement) is null and void, as it has not been approved by the Bundestag with the required two-third majority. This German decision may delay the German ratification process.  The vast majority of European businesses urges for the rapid ratification of the UPC Agreement and entry into force of the Unitary Patent system as it is expected to bring concrete benefits for businesses, including Small and Medium-Sized Entreprises (SMEs). The Unitary Patent system would minimise costs and administrative burden of patent protection in Europe, and ultimately help boost growth and competitiveness in Europe. This is even more important now as the Unitary Patent system could play a role in the economic recovery that will be be needed after the COVID-19 crisis. See also BusinessEurope position paper.

Contact: Elena Bertolotto

Calendar 

• 20 April: Making Tax Work
• 1-5 June: EU Green Week 2020
• 10-11 June: 20th European Business Summit

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