either interest-rate cuts nor new government spending would do much to offset the short-term effects of COVID-19 in Europe. Central banks and government authorities should explain this to the public, and then focus their attention on the less glamorous work of safeguarding public health, household incomes, and the financial system.
Bloomberg/Brussels
Europe wants to make it illegal by 2050 to emit more greenhouse gases than can be removed from the atmosphere.
European Commission President Ursula von der Leyen unveiled a draft law yesterday that would commit the region to become the first climate-neutral continent by the middle of the century. The legal proposal is the cornerstone of the bloc’s Green Deal, a far-reaching strategy that foresees a radical overhaul of the European economy over the next three decades.
“The Climate Law is the legal translation of our political commitment, and sets us irreversibly on the path to a more sustainable future,” von der Leyen said in a statement. “It offers predictability and transparency for European industry and investors. And it gives direction to our green growth strategy and guarantees that the transition will be gradual and fair.”
The draft measure proposes a binding target of net zero greenhouse gas emissions by 2050, with a revised target for 2030 to be put forward only later this year. That triggered criticism of the law by environmental activists, including Greta Thunberg, who called the law “surrender” because it doesn’t ensure more rapid action.
The commission has already started a deep analysis of the existing 2030 goal to cut emissions by at least 40% and aims to finish it by September, according to European Commission Vice President Frans Timmermans. Von der Leyen pledged to increase it to 50% or even 55%.
“Once we’ve done this work, we’ll propose an amendment to the climate law that we’re presenting today and we’ll put the 2030 target there as well,” Timmermans told a press conference in Brussels yesterday. The clash over the path to get to net-zero emissions highlights the challenges policy makers face as they seek to balance business interests with the ambitions of an ever-growing green movement. Fighting climate change has catapulted to the top of the EU’s agenda, with 93% of Europeans seeing global warming as a serious problem.
The Green Deal was designed to appease these concerns and become a new growth strategy for the 27-nation bloc. But regulatory proposals by the EU’s executive arm are subject to approval by member states, and the climate law reflects the need to seek a compromise between competing national positions. With differing energy mixes, wealth and industrial strength, EU governments are set to wrangle over every bit of the climate strategy and the draft law that will set the basis for the clean-up.
However, the dynamics may change with the draft measure. It will pave the way for a new regulatory track where measures to cut emissions avoid a veto by a single country, a tool that was used several times by coal-dependent Poland to halt ambitious policies.
Once approved by national governments and the European Parliament, the climate law will start a regulatory frenzy. Everything from energy production to agriculture and the design of cities will be overhauled under the Green Deal strategy that von der Leyen has described as a moonshot. “I’m excited by this,” said Peter Vis, senior adviser at Rud Pedersen Public Affairs in Brussels. “Von der Leyen is setting the ambition without knowing how we will get there. But when Kennedy committed to putting a man on the moon he also wouldn’t know if that is possible.”
Here are the main elements of the draft law:
* EU-wide emissions and removals of greenhouse gases must be balanced by 2050 at the latest
* Member states must take necessary steps to enable collective achievement of the goal by the EU
* Commission will review the current 2030 emission-reduction goal by September, exploring options for a new goal of 50%-55%
* By June 2021, commission will assess how to amend various rules on emissions, including a law on the bloc’s carbon market
* By September 2023, the commission will every five years assess the progress made by member states following global stock-takes under the Paris Agreement to protect the climate
* Commission may propose new climate targets every five years following the assessments; trajectory to get to climate neutrality will start with the goal for 2030
The EU executive is also seeking more powers to make sure the bloc delivers on the net-zero emissions goal, making it more difficult for governments and the EU Parliament to object to intermediate targets. It wants to regulate those goals via measures known as delegated acts. To oppose them, a qualified majority of votes is needed in the Council of the EU, which represents member states, and a majority in the Parliament.
The biggest challenge for Europe will be to secure investment for the environmental clean-up. The costs are dizzying: to reach the existing 2030 goal Europe needs investment of €260bn ($290bn) annually.
Earlier this year, the commission proposed a 1tn-euro plan designed to be the financing pillar of the Green Deal. It envisions earmarking around €500bn from the EU budget for the clean shift over the next decade, while separately leveraging €280bn of private and public investment and establishing a funding mechanism with another €143bn, also from public and private sources, to help regions facing the most costly clean-ups.
To ensure the Green Deal materialises to be Europe’s new growth strategy, new markets must be developed, with both public and private finance flowing to small and large companies alike to help them deploy first new technologies, according to Marco Mensink, director general of the chemical industry association Cefic.
“The proposal for a climate law is an important first step to achieve investor confidence, which is crucial,” Mensink said. “It is a start of an important journey; our sector must go through a deep transformation, within only one or two investment cycles, for which we need enabling conditions. Therefore, much more is needed.”
Bloomberg /London
A tweak to new environmental rules for the shipping industry is just days from taking effect, closing off a loophole for would-be cheats looking to cut their fuel bills.
Starting March 1, shippers will be prohibited from carrying highly sulphurous marine fuel for later consumption at sea, far from the eyes of regulators. It builds upon broader rules, widely known as IMO 2020, which have restricted vessels from burning such fuel since the start of the year.
The alteration means port authorities the world over can pounce on vessels that have non-compliant fuel on board for use on the high seas. Until now, carrying such cargo has been allowed, meaning individual vessels could save thousands of dollars every day by cheating.
“We expect fairly high compliance in North America and Europe, but lower compliance outside those major bunkering hubs, especially in Asia, Africa the Middle East and, to some extent, Latin America,” said Mark Williams, principal analyst for short-term refining and oil product markets at Wood Mackenzie Ltd.
While most of the big-name shippers are already complying with the sulphur cap, others might not be so scrupulous, Williams said. For example, a tanker carrying high-sulphur fuel could discharge the product onto another vessel via a ship-to-ship transfer in the open ocean. With no regulatory authorities around to interfere, the receiving vessel could then sail away, burning cheap, non-compliant fuel. Still, the actual number of cheats is likely to be small.
The International Maritime Organization, part of the UN, established its low-sulphur rule and the carriage ban as a way to cut down on sulphur, a pollutant that has been linked to issues from acid rain to asthma. It’s the most far-reaching change in years for both the shipping industry and fuel-producing refiners.
This year, Wood Mackenzie expects the vast majority of the world’s marine fuel burned by shippers to comply with IMO regulations. The carriage ban will likely increase compliance, but only to a limited extent, Williams said. As recently as December, a long list of countries hadn’t signed on to the sulphur limit, hampering enforcement of those rules.
The UAE, home to the bunkering port of Fujairah, has said it will take a flexible approach. Others have said the sulphur cap and the accompanying carriage ban will be applied without exception.
While the price gap between the old and new fuels has narrowed, the temptation to cheat for some must still be acute. A 10-year-old Capesize iron ore carrier can consume 62 tons of fuel a day, according to data from Clarkson Research Services Ltd. So far this year, one of the main new products, very-low sulphur fuel oil, costs an average of about $223 a tonne more in Rotterdam than the old kind, meaning a saving of almost $14,000 a day. That saving has declined in recent days.
To put that in context, some of the vessels are now making heavy losses. The carriers are earning just under $2,400 a day from charters, according to data from the Baltic Exchange in London. That’s far below what they need just to cover basic running costs like crew, insurance and repairs – let alone repay bank loans or eke out a profit.
China’s shipping association said this week that it wanted the sulphur cap delayed because the coronavirus has hit the industry’s finances hard. Marine fuel demand in February has been cut by 2mn tonnes amid a halt in activity at the country’s ports, according to Energy Aspects Ltd. The IMO said a delay won’t be possible because the rules are already under way.
The coronavirus has complicated efforts to prepare some ships for the March 1 deadline because of contingency measures at some ports, especially in eastern Asia, according to Lars Robert Pedersen, deputy secretary general of shipping industry group BIMCO.
“We expect that the vast majority of ships are prepared for the carriage ban date,” he said.
Two pioneers of the U.S. natural gas export industry were forced to sell shares of the company they founded amid a global market rout and concern that a key supply deal won’t be finalized.
Tellurian Inc. Chairman Charif Souki and Vice Chairman Martin Houston sold 4 million and 3.4 million shares respectively, according to filings late Friday. In both cases, the transactions were forced by a lender to satisfy loan requirements, the filings show. Tellurian declined to comment.
Shares of the company, which is trying to develop a $28 billion liquefied natural gas terminal in Louisiana, plunged by more than half on Friday to close at $1.80. The total weekly decline was 72%.
India’s Petronet LNG Ltd., a potential major customer that Tellurian has courted, announced earlier this week it would seek competing offers. The move highlights the mounting pressure on sellers amid a worldwide glut, and adds to doubts that Tellurian will be able to secure a sizable anchor investment from Petronet for its Driftwood LNG project. The Petronet news also dashed hopes that the two companies might finalize a supply agreement during President Donald Trump’s visit to India this week.
The coronavirus outbreak, meanwhile, sent global markets spiraling lower, adding to Tellurian’s woes. The epidemic has hit China, South Korea and Japan, the world’s biggest LNG importers, particularly hard.
Tellurian said Thursday it had extended a memorandum of understanding with Petronet by two months to May 31. Under the memorandum, Petronet agreed to negotiate the purchase of as much as 5 million tons a year of LNG from Driftwood, along with an equity investment.
Collapsing LNG prices in Asia and Europe have squeezed profits for American gas exporters, already under pressure after China halted U.S. imports of the fuel a year ago amid trade tensions. Without commitments from Chinese buyers, some American export projects may be delayed or canceled.
Souki is the founder of Cheniere Energy Inc., the biggest U.S. LNG exporter, and served as its boss before being forced out. Houston was chief operating officer at BG Group Plc and was the key architect of its LNG business. BG, which has since been acquired by Royal Dutch Shell Plc, signed the first purchase agreement with Cheniere in 2011.
Souki is worth about $500 million, according to the Bloomberg Billionaires Index. That’s largely from collecting money from shares sales of Cheniere.
The coronavirus outbreak that has sent markets worldwide on a collective nosedive is forcing U.S. oil and gas explorers already burning through borrowed cash and failing to deliver returns to the brink of distress.
Drillers’ fall from grace has worsened as shareholders increasingly demand they shift their focus to generating cash flow, instead of increasing production at any costs. Now, as bonds collapse, they face the double whammy of upset investors on both sides of capital markets — equity and debt.
The stocks of U.S. explorers are on average worth just a quarter of their peak in mid 2014, when oil started plunging from more than $100 a barrel. The S&P Oil & Gas Exploration and Production Index has plunged 82% since.
This week’s selloff exacerbated challenges facing distressed energy borrowers, which have been pressured by high debt loads, low commodity prices, disappointing earnings, and investors reluctant to keep financing them.
“The market has not really been open, or certainly hasn’t been bullish, for energy companies for a long time now,” Spencer Cutter, an analyst for Bloomberg Intelligence, said in an interview Thursday.
High-yield energy has lost nearly 8% this year, compared to a loss of only 0.8% for the broad category of high-risk borrowers, according to Bloomberg Barclays data. Energy is the biggest contributor to $105 billion of outstanding high-yield debt trading at distressed levels, with a distressed ratio of about 26%, according to Bloomberg Intelligence
Chesapeake Energy Corp., Whiting Petroleum Corp. and Gulfport Energy Corp. this week became the face of this dramatic change of fortune since the heyday of the shale boom and Gulf of Mexico exploration.
Once at the vanguard of the U.S. shale revolution, Chesapeake has fallen headlong toward collapse as it and rival drillers flooded the U.S. with excess natural gas, crushing prices and destroying billions of dollars in value.
Its options for dealing with its towering debt load are scant. Chief Executive Officer Doug Lawler mapped out a survival strategy predicated on a sweeping divestiture program that must be consummated within months in a market already glutted with North American gas holdings.
Chesapeake’s shares have all but evaporated in value, trading below 30 cents. It’s 11.5% bonds maturing in 2025 have plunged 28% this week to 57 cents on the dollar. The yield on the security, a measure of how much investors will demand in gains to take the risk of holding it for a year, has surged to almost 30%, about the same level as government bonds from troubled Lebanon.
Whiting’s stock is down 75% this year amid reports that the oil producer is holding discussions with advisers to review its capital structure. The Denver-based company is looking at a potential debt exchange, Debtwire reported this month, citing people familiar with the matter.
The shale explorer’s 2020 bond has plummeted 26% this week to 37.5 cents on the dollar, with the yield jumping to about 30%.
Gulfport bonds, along with Chesapeake’s and Whiting’s, were among the energy debt securities that most tanked this week.
Earlier this month, Piper Sandler & Co. downgraded Gulfport Energy to neutral telling investors in a note: “darkness has devolved into pitch black” for the firm’s outlook on the natural gas market.
Gulfport’s 6% bonds due October 2024 fell to a record low of 33.75 cents on the dollar, to yield 37% on Friday.
Its shares have followed Chesapeake into penny stock territory, closing Friday at little more than 80 cents, after a 35% plunge this week.
A buyer of liquefied natural gas has cancelled two cargoes from Cheniere Energy Inc, the biggest US exporter, as a glut pummels prices for the fuel and threatens to shut a key outlet for shale production.
Spanish utility owner Naturgy Energy Group SA has decided not to take delivery of two shipments from Cheniere, according to people with direct knowledge of the matter. The cargoes, one of which was scheduled for April delivery, were rejected by Naturgy’s clients Repsol SA and Endesa SA, who had originally purchased the volumes from Naturgy and will now pay a contractual fixed fee, the people said.
Cancellations of US cargoes were closely watched and highly anticipated amid a grim outlook on global prices. It could be an early sign that global oversupply is poised to hammer the US gas market, which is already straining under the weight of a domestic glut. Prices in Europe and Asia collapsed as storage levels rose during a mild winter, making it tougher for LNG buyers to make a profit reselling US cargoes abroad.
The coronavirus outbreak in China is stifling LNG demand from the world’s fastest-growing importer. While the Asian nation hasn’t directly imported any US cargoes in more than a year amid trade tensions, the virus has contributed to the global price rout.
The virus has wreaked havoc on commodity markets from LNG to copper while disrupting global industrial production, travel and supply chains. As Chinese demand for the fuel declined, PetroChina Co is said to have delayed discharge of multiple cargoes. The world’s biggest LNG trader, Royal Dutch Shell Plc, said they’re working with customers to reschedule or reroute deliveries. While lower prices are opening up demand in places such as India and Turkey, they’re also testing Europe’s ability to absorb extra supply in a weak market.
“We are seeing supply reduction before demand maximization in Northwest Europe,” said Verena Viskovic, an analyst at BloombergNEF. Even with European benchmark Title Transfer Facility prices crashing more than a fifth since the start of the year, those TTF levels still “are not low enough to fully maximize lignite-to-gas switching,” she said.
At current forward prices of US and European gas, the profit margins of delivering US LNG to Europe and to Asia are thin, according to a BloombergNEF noted last week. Exporters of US LNG may be forced to keep gas at home during the next seven months despite the potential demand in the German power sector.
At least two Japanese buyers are also considering cancelling cargoes from the US that they had expected to load before summer, according to traders with knowledge of the matter, adding that no final decisions have been made.
LNG exports have been a relief valve for US gas producers as output from shale basins soars to record highs. In the Permian Basin of West Texas and New Mexico, where gas is extracted as a byproduct of oil drilling, prices have slid below zero amid pipeline bottlenecks; that means producers are paying others to take their supply.
More gas-fired power plants would have to be built in the US and abroad to ease the current supply glut, said Campbell Faulkner, chief data analyst for commodities broker OTC Global Holdings.
The US gave into pressure from Europeans over environmental concerns, allowing the word “climate” into a joint communique at a conference overshadowed by a viral outbreak that’s shaken the global economy.
Delegates at the G20 meeting in Riyadh spent much of their time talking about a global slowdown exacerbated by the coronavirus outbreak, but struggled to come up with a united response, according to people familiar with the deliberations. Countries such as Japan, and institutions including the Organisation for Economic Co-operation and Development, have been pushing for those with surpluses to spend more.
One of the main addressees of the calls for more spending is Germany. So far, the export-driven country has showed little interest in significantly boosting expenditures, arguing fiscal stimulus can’t bolster foreign demand.
On climate change, differences of opinion in the Saudi capital were more stark. The US, represented by Treasury Secretary Steven Mnuchin, objected to including a reference to the subject, according to four people familiar with the communique-drafting process. The Saudi delegation, which is hosting the event, didn’t show much enthusiasm for it either, according to two of them.
After several days of heated debate, including France finance chief Bruno Le Maire cornering Mnuchin late on Saturday in Riyadh as the G20 economic leaders dined, the US reluctantly agreed to a mention of climate change, according to two people familiar with the matter.
A Treasury spokeswoman didn’t reply to a request for comment.
As of Sunday morning in Riyadh, it was also looking unlikely that representatives would leave Saudi Arabia with any breakthroughs on a global taxation system that would apply to multi-national companies including tech giants like Alphabet Inc’s Google and Facebook Inc, according to the people.
Europeans have baulked at a US proposal that new global rules should be a “safe harbour” regime. Mnuchin sought to reassure his counterpart by insisting such a system would not mean the rules would be optional, but Europeans said they still needed to fully assess the proposal.
If there’s no agreement, several European nations will go ahead with taxes on revenues of multinational digital firms. That could spark a transatlantic trade war as the US says such measures are discriminatory and has already threatened France with tariffs.
France and the US have held tense discussions on the subject since France introduced a 3% levy last year on the digital revenue of companies that make their sales primarily online. The move was supposed to give impetus to international talks to redefine tax rules, and the government has pledged to abolish its national tax if there is agreement on such rules.
In introducing a so-called global minimum tax — a measure intended to prevent large companies from shifting profits to low-tax locales to avoid paying them at home — the sides are closer to compromise as there’s little difference among current corporate tax rates among major economies, and little concern that the minimum tax would be too low, one person said.
Asian spot prices for liquefied natural gas (LNG) rose this week after five weeks of declines, as lower prices sparked cargo purchasing interest from various buyers.
The average LNG price for April delivery into northeast Asia was yesterday estimated at around $3.00 per million British thermal units (mmBtu), some $0.30 per mmBtu higher than the front-month price last week, which was assessed for March.
“Many players are trying to buy due to low price levels, there are lots of tenders and bids,” an LNG trader said.
Fears that the coronavirus outbreak in China would weigh on demand are receding, two industry sources said, which has also supported the prices.
Indian buyers who have been active in the market over the past several weeks on an LNG price drop to record low levels, continued issuing spot and multi-cargo tenders.
India is estimated to import about 2.36mn tonnes of LNG in February, record monthly volumes for the South Asian nation.
Among companies which sought cargoes for delivery to India were Reliance Industries with a five-cargo tender for April to June supply, Emirates National Oil Company (ENOC) with April to November delivery eight-cargo tender and Gail India with a swap tender for three cargoes in February to March.
There were single cargo tenders from India’s Gujarat State Petroleum Corp (GSPC) who sought a March cargo and Indian Oil who was looking to buy an April cargo.
Prices in some of the tenders were ranging from around$2.50/mmBtu to just below $3.00/mmBtu, several market sources said.
Additionally, Qatargas’ Al Hamla LNG tanker is currently on route to India’s newly commissioned Mundra LNG Terminal to deliver the first commercial cargo at the facility, Kpler said.
Buying interest also came from Jordan’s Nepco who was looking for an April cargo, as well as Turkey’s Botas who sought three March cargoes.
Botas awarded all three cargoes, three sources said, and prices could be as low as around $2.50/mmBtu, one of them added.
There was also a tender from Taiwan’s CPC in the past fortnight, two sources said, with one adding that the tender was for three cargoes to be delivered from April to June.
The number of bids on S&P Global Platts Market on Close window also grew this week, with some bids reaching $3.00/mmBtu for late March and early April yesterday.
The global LNG market remains heavily oversupplied, however, with spreads between gas prices globally shrinking and market players expecting production cuts.
Spain’s Naturgy has cancelled loading of one LNG cargo in the United States in April amid a slump of global gas prices, with several other companies having considered cancellations as well, sources told Reuters.
In terms of supply offers, Gail India was selling three US cargoes as part of a swap tender to sell and buy cargoes.
Angola LNG closed a tender for mid-March delivery and opened another for late March, a market source said.
Royal Dutch Shell said on Tuesday it had temporarily suspended production at its Prelude floating LNG facility off northwest Australia following an electrical trip on February 2.
McAfee security researchers were able to trick Tesla vehicles into breaking the law by placing electrical tape on speed limit signs, in a demonstration of another vulnerability for self-driving cars.
In findings disclosed by McAfee through its official blog, the security company revealed that it fooled 2016 models of Tesla’s Model X and Model S, which used camera systems by Intel’s Mobileye, into breaking speed limits with the strategic placement of electrical tape.
Researchers applied a single piece of black electrical tape to extend the middle line in the “3” of a 35-miles-per-hour speed limit sign. This tricked the MobilEye camera into reading the sign as 85 miles per hour, forcing the Tesla vehicle’s cruise control system to accelerate the car beyond the true speed limit.
Intel disputes that the trick was an adversarial attack, as the tape may also have fooled some human drivers into thinking that the tampered sign said 85 miles per hour.
Tesla, however, stopped using Mobileye’s camera systems in 2016, which means that the newer Tesla vehicles are not affected by the electric tape trick. In addition, other vehicles using newer versions of Mobileye technology also appear to be resistant to the manipulation.
BRUSSELS – The spread of the COVID-19 coronavirus across Europe and the United States has led to a sharp financial-market correction and prompted calls for active monetary and fiscal policy to prevent a recession. But a closer look suggests that such an approach might not help much at all.
The COVID-19 epidemic is marked by uncertainty. Technically, it does not represent a “black swan” event, because there have been other pandemics before. But it was, until a few months ago, unforeseeable, at least in specific terms. And it will have a long-lasting impact even if its precise evolution cannot be predicted today.
For now, it seems that the virus is moving westward. In China, where the virus emerged, infections are declining after the authorities implemented radical measures – including lockdowns that brought the economy to a standstill for over two weeks. Although it is too early to tell whether the virus has really been contained, economic life now seems to be normalizing gradually, implying that the “China shock” may be unwinding.
In the US and Europe, by contrast, the shock seems to be just beginning, with a fast-growing number of new infections raising the specter of severe economic disruption. This risk is particularly pronounced in the eurozone, which may not be able to weather a severe downturn without spiraling into crisis.
To be sure, the epidemic’s direct fiscal consequences seem manageable. Even Italy, which is currently suffering the most, could increase public spending for virus-containment measures without violating EU fiscal rules.
If these costs spiral – as seems likely, now that a quarter of the country, accounting for most industrial and financial activity, is under lockdown – the European Union should be able to offer support to Italy beyond allowing the government to run a larger deficit. Article 122.2 of the Treaty on the Functioning of the EU allows the European Council to grant financial assistance to a member state facing “severe difficulties” caused by “exceptional occurrences beyond its control.” This procedure should be activated now.
In any case, COVID-19’s trajectory suggests that it will likely spread farther, forcing other EU member states to adopt public-health measures at the expense of economic activity, particularly in important sectors such as travel and tourism. Moreover, supply chains will be impaired, not only by the temporary shutdown of the Chinese export machine, but also by disruptions within Europe. Neither interest-rate cuts nor new government expenditures would do much to offset the short-term effects of such shocks.
The more serious problems are likely to emerge from the financial system. While many firms can slash production quickly, running a business in “disaster recovery mode” still costs money, and debt still comes due. In Europe, where labor costs cannot be cut in the short run, the challenges this raises could be particularly serious.
Fortunately, most EU members have some system in place under which the government covers the wages of workers who become temporarily redundant for reasons outside of their employers’ control. These mechanisms, which would sustain personal incomes during the crisis, are the main reason why a long-lasting drop in consumption is unlikely. Once the virus is contained, European consumers will have little reason not to spend as much as before.
Yet two other possible developments could tip the eurozone into recession. The first is a sharp slowdown of global trade, which the EU has little power to counter. The second is a collapse in investment, which the EU can and should work to prevent.
The last eurozone crisis demonstrated that investment collapses when the financial system stops functioning. In market-based systems, like that of the US, this is a question of risk premia and plain access to credit, which policymakers can hardly influence. For Europe, with its bank-centric financial system, the key to weathering the COVID-19 crisis is thus to keep the banking sector healthy.
For that, a calibrated supervisory response is essential. The shift of banking supervision to the European Central Bank has led to more rigorous and selective credit policies by commercial banks. While this has reduced banking risks, applying tough lending standards at a time of severe economic stress caused by public-health measures could punish otherwise creditworthy firms that are facing temporary losses.
Italy’s government is providing direct financial support to companies directly affected by the lockdowns. But if the crisis spreads, the number of sectors that are affected (often indirectly) will increase. Governments cannot provide financial support to all of them. Banks can do much more, but only if they are willing to overlook bad financials. Supervisors should allow – and even encourage – such an approach.
A forbearance-based approach – together with the “automatic” fiscal stabilizers built into Europe’s social-security systems – would do far more to mitigate the risk of crisis than microscopic interest-rate cuts.
Additional fiscal stimulus, meanwhile, would be needed only in the unlikely event that the economic disruption is followed by a period of depressed demand. The eurozone’s fiscal rules pose no obstacle to such a policy mix, because they are flexible enough to permit temporary deficits that result from lower tax revenues, or fiscal support to sectors hit hard by exceptional circumstances. Nonetheless, the COVID-19 epidemic should serve as a reminder of the value of maintaining prudent fiscal policy during normal times. Countries with lower deficits and debts are in a much stronger position to respond to the COVID-19 shock than those, like Italy and France, that have not created fiscal space.
In the face of a severe shock, public authorities must act – and be seen acting. But, in this case, the usual macroeconomic instruments are unlikely to work. Central banks and government authorities should explain this to the public, and then focus their attention on the less glamorous work of safeguarding public health, household incomes, and the financial system.