Facing recession, Europe grasps for ways to limit damage

European Central Bank President Christine Lagarde talks to German Finance Minister Olaf Scholz during a meeting of European Union Finance Ministers in Eurogroup format at the Justus Lipsius building in Brussels, Monday, Feb. 17, 2020. (AP Photo/Francisco Seco)
European Central Bank President Christine Lagarde talks to German Finance Minister Olaf Scholz during a meeting of European Union Finance Ministers in Eurogroup format at the Justus Lipsius building in Brussels, Monday, Feb. 17, 2020. (AP Photo/Francisco Seco) (Copyright 2020 The Associated Press. All rights reserved)

FRANKFURT – Suddenly staring recession in the face, European leaders are lining up an array of tax breaks, financial support for companies and likely central bank measures in the hope of preventing the coronavirus outbreak from dealing long-term damage to the economy.

Expectations have grown that European Central Bank officials will announce more monetary stimulus when they meet Thursday, after the Bank of England acted Wednesday and the U.S. Federal Reserve last week.

The European Commission plans to set up a 25 billion-euro ($28 billion) investment fund to support the health care system, businesses and labor market measures. The Italian and British governments are offering separate packages of at least the same size.

Yet any such actions will likely be more damage limitation than cure.

Monetary stimulus and government spending can spur demand for goods. But the coronavirus deals a shock from the supply side by closing businesses and making people stay home, highlighted by Italy's dramatic decision this week to limit travel and public gatherings across the country. Lower interest rates or tax cuts cannot solve that.

Meanwhile, action to help the 19 countries that use the euro currency faces constraints from the lack of a large central treasury, a hurdle other large economies like the U.S. and China do not face.

“The world is facing a medical emergency that monetary and fiscal policy cannot fix,” said Holger Schmieding, chief economist at Berenberg private bank.

The best policymakers can do for the economy is to prevent the virus from dealing prolonged damage even after the outbreak ends, to keep small- and medium-sized companies that provide most of the jobs in the economy from going out of business due to a short-term issue beyond their control.