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Home / Business News / Europe is approaching a distastrous economic cliff edge

Europe is approaching a distastrous economic cliff edge

In coming months, emergency programs will expire across Europe, creating the risk of a second-wave hit to the economy.

business Updated: Jun 25, 2020 11:24 IST
Bloomberg | Posted by Kanishka Sarkar
Bloomberg | Posted by Kanishka Sarkar
Workers cut the grass on the tarmac at Orly airport near Paris in preparation for its re-opening following the coronavirus disease (Covid-19) outbreak in France on June 24, 2020.
Workers cut the grass on the tarmac at Orly airport near Paris in preparation for its re-opening following the coronavirus disease (Covid-19) outbreak in France on June 24, 2020. (Reuters Photo)

In northern Portugal, Tiago Carvalho is nervously counting the days until his business has to stand on its own two feet again.

The restaurant owner in Braga, home to the country’s oldest cathedral, says revenue is less than a third of what it was before the coronavirus kept tourists away and confined locals to their homes. Even with lockdown restrictions largely rolled back, customers have stayed away, reflecting the slow pace of recovery across Europe.

Unless that changes soon, Carvalho and thousands of others like him are in trouble. At the end of July, Portugal plans to stop its so-called “simplified layoff” program, which like dozens of similar government programs across Europe has helped keep people in their jobs by paying part of the compensation for staff unable to work.

The cliff edge for firms and workers in Portugal echoes those looming over much of Europe. In coming months, emergency programs will expire across the continent, creating the risk of a second-wave hit to the economy.

“The layoff measure has to continue or else restaurants will have to dismiss workers,” said Carvalho, 40, who runs two eateries in Braga and acts as a spokesman for a local group representing about 140 restaurants. One lunchtime last week, he served only two tables at one of his restaurants.

After July, the Portuguese government plans to transition to other measures that include incentives for companies to keep jobs, but the impact is uncertain.

Governments elsewhere are also aware of the danger. Many are tapering programs rather than shutting them off, and some are trying to extend support further despite the pressure on budgets.

But that may not be enough, with demand across the continent well off its pre-crisis levels, and perhaps unlikely to be fully restored any time soon. Figures from Insee, France’s statistics office, show activity in Europe’s second-largest economy still more than 10% below normal.

For companies, particularly small firms with limited cash reserves and razor-tight margins, that gap could be the difference between survival and collapse. Closure means job losses, and a negative spiral of rising unemployment and falling demand, all of which is bad news for already battered economies and strained public coffers.

Governments have already pumped billions into support schemes , and blown out their budgets in the process. At the center are furlough programs, with more than 45 million workers protected during shutdown. However, some of those are temporary, meaning they may only be delaying job losses.

Allianz SE warned in a report this month that 9 million of those people face an elevated risk of becoming unemployed in 2021 because of the fiscal policy cliff. In the UK, a survey of employers estimates a quarter of furloughed workers could lose their jobs when the government begins reducing its subsidy.

The Bank of England has warned many benefit recipients may become permanent casualties of the crisis. Former Governor Mervyn King said last week that the UK program shouldn’t end too early, but be maintained “right up until the point we see GDP very close to where it was before Covid-19.”

Across Europe, many economies will suffer double-digit slumps in output in 2020. The big hit will be this quarter, the peak of lockdown restrictions. That’s almost certain to be followed by a steep rebound, but rocketing GDP numbers don’t necessarily translate into a sustainable recovery.

Eduardo Zamacola, head of Spain’s textile association, knows that early signs can be deceiving. After once-confined Spaniards started to shop and travel following the end of curbs on public life, stores enjoyed a burst of activity -- which he fears could quickly fizzle out as concerns about the future weigh on confidence.

“This is going to be a very difficult long-distance race,” he said.

Europe Support

To help economies back on their feet, some countries are betting traditional fiscal stimulus can spark a rebound. Germany is rolling out a 130 billion-euro ($147 billion) spending package after earlier unleashing more than 1.2 trillion euros to stabilize its economy, Europe’s largest.

Chancellor Angela Merkel’s government has vowed to spend whatever it takes to get the country growing again, including extending its renowned Kurzarbeit wage-support program. After years of German budget surpluses that’s been welcomed by other nations, but the country is a rare exception in Europe. Most of its peers face stressed finances.

That puts pressure on European institutions to deflect the pressure. The European Central Bank is keeping investor concerns about ballooning national debt at bay with huge bond-buying in the euro zone, and the European Union plans to back that up with a 750 billion-euro fiscal package.

Such support gives countries the scope to dig even deeper. Italy has extended furlough programs to 18 weeks from 14 weeks, which will protect some workers until the end of the summer. Prime Minister Giuseppe Conte’s government is also planning to stretch its finances with another 10 billion euros in stimulus, even though the nation’s debt ratio looks set to top 150% of GDP this year.

For businesses who saw daily life change as governments switched off their economies, it’s clear that switching them back on is proving far harder.

“The need to guarantee we keep jobs isn’t going to end in July,” said Antonio Saraiva, president of the Portuguese Business Confederation. “The crisis doesn’t end by decree, and consumption doesn’t start by decree.”

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