COVID-19: main fiscal and monetary measures

1.European Union-Louis Boisset

2.Eurozone : comparative outline of the national emergency fiscal measures-Hélène Baudchon

3.Germany-Raymond Van Der Putten

4.France-Hélène Baudchon

5.Italy-Guillaume Derrien

6.Spain-Guillaume Derrien

7.European Central Bank-Louis Boisset

8.United States-Jean-Luc Proutat

9.Federal Reserve-Céline Choulet

10.United Kingdom-Hubert de Barochez

11.Bank of England-Hubert de Barochez

12.China-Christine Peltier

13.Central Bank of China-Christine Peltier

European Union: main fiscal support measures

European Union member states acted swiftly on the fiscal front to tackle the effects of the Covid-19 pandemic on household incomes and business cash flow. The current crisis has also brought a strong fiscal response at the European level, which was necessary. The Eurogroup has notably proposed a significant package to help tackle the crisis, worth EUR 540 billion (or around 4.5% of Eurozone GDP). These measures have since been approved by the European Council. The European Commission’s proposed EUR 750 billion Recovery Fund still needs to be agreed by member states. The question of the share of grants vs loans would appear to be particularly sensitive.

Eurozone : comparative outline of the national support fiscal measures

Germany: main fiscal support measures

On 3 June, the federal government announced a stimulus package to revive the economy worth EUR 130 billion (4% of GDP in 2020). The programme consists of a long list of 57 points. Almost half of the stimulus is directed at mitigating the adverse economic and social consequences due to the crisis. A key element is the temporary lowering of the VAT rate in the second half of 2020. The standard rate will be cut from 19% to 16% and the reduced rate from 7% to 5%.

The programme also aims at modernising and greening the economy through digitalisation, improving mobility, climate protection and subsidising the technologies of the future such as hydrogen-based and quantum technologies.

In addition, the federal government will provide financial support to the states and municipalities as compensation for increased social spending and disappointing tax receipts. The Bundesbank estimate that the programme will boost growth by 1 percentage point in 2020 and 0.5 pp in 2021.

France: main fiscal support measures

As soon as 23 March, France has deployed a substantial arsenal of measures around five pillars: additional healthcare spending, the extension of short-time working, a solidarity fund for the smallest distressed businesses, deferrals of tax and social security payments and government-guaranteed loans. From an initial sum of EUR 345 billion, the total amount allocated to the emergency relief package has been increased on a number of occasions to reach EUR 455 billion or nearly 21% of GDP (by 16 June).

Whilst the scale differs from those seen in its major European partners the measures are similar in nature, with the goals of addressing urgent need, cushioning the recessionary shock and preparing the recovery, which the government will now need to support. It is time for stimulus plans, plural: first for particular sectors (tourism, automotive, aerospace, etc.) and then more widespread (currently being drawn up, due to be announced in September, first measures, including the development of the short-time working scheme, being expected earlier, by mid-July).

Italy: main fiscal support measures

On 16 March, the Italian government introduced the Cura Italia emergency programme, worth EUR 25 billion. This was significantly expanded on 14 May, by a recovery decree allocating a further EUR 155 billion. Major aspects of the package include the expansion of the redundancy fund (to finance short-time working), tax exemptions, the partial repayment of rent for companies and a moratorium until 30 September on repayment of loans to SMEs.

The government would also allow total loan guarantees to reach up to EUR 530 billion, which would push the total support package to around EUR 780 billion.

The general assemblies that took place between 13 and 21 June have helped design the shape of a major recovery plan. Several measures have been discussed such as a VAT reduction, new tax credits for companies, and a modernisation of the rail network. This programme is due to be presented to the European Commission in September.

Spain: main fiscal support measures

To tackle the crisis, the Spanish government introduced on 17 March an emergency plan worth EUR 117 billion of public funds (EUR 200 billion including the private sector contribution). This programme consists of EUR 100 billion in financial guarantees to companies and EUR 17 billion in direct support, mainly in the form of healthcare spending, short-time working and deferred tax and social security payments for companies and individuals.

This emergency programme has since been expanded with two stimulus packages to support strategic sectors that have been hit hard by the crisis. On 15 June, the government brought forward a EUR 3.5 billion plan for the automotive industry, which was followed, on 18 June, by a list of measures for the tourist industry worth EUR 4.26 billion. In parallel, a EUR 16 billion solidarity fund for the autonomous communities was introduced, mainly to help local authorities meet their financial obligations.

ECB: main monetary support measures

In the face of the Covid-19 crisis, the European Central Bank (ECB) has adopted a particularly proactive and flexible approach. In all, with initial net monthly asset purchases (EUR 20 billion/month), additional asset purchases by the ECB by mid-2021 will represent around 15% of Eurozone GDP. The shock of the pandemic poses a considerable threat to price stability and could increase the financial fragmentation of the Eurozone. With this in mind, the ECB will maintain a flexible approach and a further expansion of its asset purchases envelope is to be expected.

United States: main fiscal support measures

Congress has passed no fewer than five laws to deal with the consequences of the Covid-19 pandemic since the beginning of March. The major piece of legislation, the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) commits up to USD 2,300 billion (10% of GDP) of federal funds to support US households and companies, mainly in the form of guaranteed loans and tax credits and deferrals. Fiscal measures have subsequently been enhanced, taking the total budget to USD 3,600 billion (16% of GDP). As the power of automatic stabilisers (transfers) in the US is relatively low, two-thirds of the total budget is available in the form of direct allocations; federal actions (extensions of unemployment benefits, cheques sent to households, etc.) managed to protect incomes in the second quarter of 2020, as economic activity crumpled.

Federal Reserve: main monetary support measures

In just three months, the massive economic support provided by the Federal Reserve has swollen its balance sheet by USD 2,800 billion, helping ease the extreme financial tensions triggered by the Covid-19 pandemic. At 17 June, its balance sheet -- now bigger than that of the ECB -- was more than USD 7,000 billion, or 33% of GDP. Its purchases of securities, liquidity facilities, lending programs and US dollar liquidity swap lines have injected nearly USD 1,300 billion of additional central bank money such that at mid-April the aggregate amount of deposits at the Fed of all depository institutions had exceeded its previous record, set following QE3 in October 2014. Although the available amounts for these various measures are already huge, the Fed has stated that it is ready to step up its support to the economy and the financial markets if need be.

United Kingdom: main fiscal support measures

In addition to measures to support business cash flows, the UK government has pledged to guarantee at least GBP 330 billion in loans. So far, the various programmes launched to that effect – including the Covid Corporate Financing Facility (CCFF), created in cooperation with the Bank of England – have supplied more than GBP 60 billion in financing.

When it comes to households, the government has extended its furlough scheme (CJRS) until October, although the share of wages covered and the maximum amount will be gradually reduced. Since 1^st July, businesses can bring furloughed employees back to work on a part time basis.

Bank of England: main monetary support measures

The Bank of England has taken action on all fronts, including by reducing its base rate, extending its quantitative easing programme and launching financing and liquidity support programmes. However, while the refinancing programmes for banks (TFSME) and companies (CCFF) will continue for several months, the Bank is beginning to scale back support elsewhere. Its CTRF liquidity programme was discontinued on 26 June, and operations to provide dollar liquidity take place only three times a week since July, compared with daily previously.

China: main fiscal support measures

The fiscal stimulus plan has been introduced gradually since February. At the end of May, the government published its budget and announced its deficit target for this year. The deficit is due to increase by CNY1trn in 2020 and reach 3.6% of GDP, vs. 2.8% in 2019. Yet, this « official » budget largely under-estimates the real extent of the fiscal stimulus plan, which has several components. Some items are included in the budget, some others are off-budget, incurred by various funds (social security funds, fund financed by special bond issues, local government’s financial vehicles, etc.).

Fiscal stimulus measures that have been introduced/announced in response to the health and economic crisis aim to support sectors directly hit by the impact of the epidemic, support corporates’ and households’ income and support the labor market. Public investment in infrastructure projects remain a privileged policy instrument and has rebounded over the past two months. It is largely financed by the issuance of « special » bonds by the central government (CNY1trn is due to be issued in 2020 – last time the central government issued this type of special bonds was in 2007) and by local governments (their bond issuance quota for 2020 was raised to CNY1.6trn to CNY3.75trn). Measures in favor of micro enterprises and SMEs, employment and private consumption should be implemented more gradually.

Bank of China: main monetary support measures

Monetary stimulus measures aim to support corporates and sectors that have been hit by the coronavirus outbreak, help prevent defaults and bankruptcies, limit the risk of financial-system instability and facilitate the economic recovery. People’s Bank of China (PBOC) has injected liquidity in the financial sector in order to meet demand, cut the main policy rates and encouraged banks to refinance loans and cover corporates’ financing needs. Micro and small enterprises appear to be a great concern to the authorities. Growth in total domestic credit (social financing) accelerated to 12.5% year-on-year in May 2020 from 10.7% in February. It could reach 13% to 14% at the end of 2020. As a matter of fact, the easing in monetary and credit conditions should remain prudent, as the central bank’s room for maneuver is severely constrained by the already excessive level of debt of the economy.