Europe stands united with fiscal support package of requisite magnitude, IMF says

Of the $10 trillion poured into the global economy to stem job losses and support small businesses, one third has come from the EU

Tourists ride a gondolier in view of the Rialto Bridge on the Grand Canal in Venice, Italy, on Saturday, June 13, 2020. The shuttering of businesses led to a 5.3% decline in gross domestic product in the first quarter, and a far deeper slump is anticipated this quarter. Photographer: Andrea Merola/Bloomberg

Europe is standing together at a difficult time and has put forward a fiscal support package of the requisite magnitude to help countries cope with the fallout from the Covid-19 pandemic, the International Monetary Fund said.

“This is money that Europe will get from markets on the basis of its strength, and that it will distribute to member states on the basis of their needs,” the fund’s managing director, Kristalina Georgieva, said.

“And I want to say clearly – it is not just about the money. It is a chance for Europe to restart its convergence engine, which has been stalling since the global financial crisis.”

The outbreak has killed more than 430,000 people and infected about 7.8 million people around the world, according to Johns Hopkins University, which is tracking its spread. It also forced governments to close borders and shut all but essential businesses, bringing economic activity to a halt.

Italy, Spain, France and Germany were among the hardest-hit EU countries. Governments and central banks have so far poured $10 trillion (Dh36.7tn) into the global economy to stem job losses and support small businesses, according to the fund.

One third of that amount, Mr Georgieva said, has come from Europe, with the European Central Bank taking additional steps to ease liquidity and bring stability to financial markets.

“Why is this important? Because, if the economists among us remember the definition of depression, [it] is a significant reduction in output, lasting several years,” Ms Georgieva said.

“Now, with these exceptional measures, we have put a floor under the world economy and, therefore, we are reducing dramatically the risks of scarring and the longevity of this crisis.”

However, the short-term outlook for recovery remains bleak as the world economy faces its worst recession this year since the Second World War.

Earlier this month, the Organisation for Economic Co-operation and Development projected that global output would contract 7.6 per cent this year in the absence of a vaccine.

The World Bank forecast that global output would shrink by 5.2 per cent, while the IMF said in April that it would contract by 3 per cent.

Ms Georgieva said the fund is expected to cut its growth projections when it releases its new estimates on June 24.

“We are likely to revise downward further on the basis of incoming data, which tells us that most countries are doing worse than we had projected,” she said.

Only a handful of countries have done better, Ms Georgieva said.

“The real economy is hit hard,” she said.

The IMF said last week that 90 per cent of the world’s economies, or about 170 countries, will be “worse off” with lower per capita income by year-end. This is a sharp divergence from a January projection of economic growth for 160 countries.

The policy actions of larger economies have had a positive spillover effect on emerging market economies, which recorded capital outflows of around $100 billion in March.

These outflows severely hindered access to debt capital markets, even for nations with relatively strong economic fundamentals, but that situation improved in April and last month, Ms Georgieva said.

There are, however, countries that remain in dire financial straits.

“These are emerging markets with weak fundamentals and high debt levels, and low-income and fragile countries. And this is where the attention of the IMF is now concentrated,” Mr Georgieva said.

The IMF has in the space of six weeks provided financial support to 68 countries in need of buffers against the crisis.

“Never in the history of the IMF have we done so much in such a short period of time,” she said. “We have also taken action to provide debt relief to our poorest members, as well as the so-called G20 debt service suspension initiative, which is intended to help provide space to respond to the crisis for 73 vulnerable countries.”