Europe’s Economic Revival Is Imperiled, Raising the Specter of a Grind…


LONDON — Europe was supposedly done with political histrionics. In the face of the pandemic, a continent not known for common purpose had put aside long-festering national suspicions to forge a collective economic rescue, raising hopes that a sustainable recovery was underway.

But the European revival appears to be already flagging, and in part because of worries that traditional political concerns may disrupt economic imperatives.

The European Central Bank — which won confidence with vows to do whatever it took to stabilize the economy and support lending — has been hesitant to reprise such talk, sowing doubts about the future availability of credit.

National governments that have spent with abandon to subsidize wages and limit layoffs are wrapping up those efforts, presaging a surge of joblessness.

And in the midst of the worst public health emergency in a century, twinned with the most severe economic downturn since the Great Depression, the British government has opted to unleash a fresh crisis: It has sharply escalated fears that it may follow through with years of bellicose threats to abandon Europe without a deal governing future commercial relations across the English Channel.

A chaotic Brexit would almost certainly worsen Britain’s already terrible economic downturn while also assailing major European trading partners like the Netherlands, France and Spain.

Ms. Lagarde reportedly played a behind-the-scenes role in bringing to fruition a landmark development in the history of the European Union — an agreement to forge a $750 billion euro rescue fund, with much of the money raised through the sale of bonds backed collectively by member nations.

In previous emergencies, northern European countries — especially Germany, the Netherlands and Finland — had opposed putting their taxpayer money on the line to cover the shortfalls of their southern European brethren while indulging crude stereotypes about the supposedly profligate ways of the Mediterranean.

Such episodes had revealed Europe to be a union in name only — a reality that tended to enhance trouble, prompting investors to demand higher rates of return for loans to Spain, Portugal and Italy, lifting borrowing rates for those countries.

But the passage of the coronabond proposal — which was championed by France and Germany — cemented the sense that the pandemic had brought about a maturation of the bloc.

“The rich countries have shown they are willing to put their credibility on the line to support the others,” said Christian Odendahl, the Berlin-based chief economist at the Center for European Reform. “That will stabilize expectations about the European economy going forward.”

But he was struck by Lagarde’s reticence in pledging further action last week. “I would have expected her to be a bit more aggressive, and say, ‘OK, if this continues, we will need to do more,’” Mr. Odendahl said.

About 500 billion euros was dispensed to troubled companies via tax cuts, subsidies and state-backed loans. More than one million private-sector workers in industries ranging from restaurants to aerospace have been promised an additional year of wage subsidies.

All told, the government is covering 90 percent of the French economy’s coronavirus-related losses, said Patrick Artus, chief economist at the French bank Natixis and an economic adviser to Mr. Macron’s government.

An economic plunge that had been forecast to reach 10.3 percent this year has been moderated to 8.7 percent, the Banque de France said on Monday.

But some economists, who say more support is needed, worry that a new 100 billion euro “turnaround plan” announced last week by Mr. Macron’s government will fall far short of generating a revival.

The program largely focuses on longer-term investments over the next decade in green industries like electric car batteries and hydrogen power. It comes as Green Party candidates are sweeping into power in major French cities, prompting Mr. Macron’s government to shift toward more ecological policies.

About a third of the money would subsidize corporate tax cuts to stimulate long-term investment. The government is betting that if it can instill confidence that a brighter future is unfolding, French savers will invest in forward-looking industries and generate jobs.

Economists affirm the logic, but fret that the benefits could take too long to emerge.

“The ambition is there,” Charlotte de Montpellier, an economist at ING Bank, said in a note to clients. “But the realization could turn out to be more complicated than expected.”


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