The European Central Bank warned Wednesday that a premature withdrawal of government support to the eurozone’s pandemic-hit economies could derail the recovery and trigger a wave of bankruptcies.
An “abrupt” end to the measures could “result in a more severe economic contraction than during the first wave of the pandemic,” the ECB said in its twice-yearly financial stability report.
Eurozone governments have taken unprecedented steps to shield companies and workers from the pandemic fallout, including through guarantees on bank loans and repayment moratoriums, massive short-time working schemes and aid for businesses hit by shutdowns.
Despite recent optimism about Covid-19 vaccines, “there is a long road ahead,” ECB vice president Luis de Guindos said in a statement.
“Authorities will have to make difficult decisions on whether and how to extend policy measures and, eventually, deal with the debt they create,” he said.
If fiscal support is not maintained for the full length of the crisis, firms most affected by social distancing restrictions “may face severe solvency issues or a more permanent disruption to their business models”, even as other sections of the economy recover, according to the ECB report.
Concerns over a slew of bankruptcies are already high due to the levels of debt incurred by companies and households during the first wave of the pandemic.
ECB President Christine Lagarde has previously said her biggest concern was governments creating a “cliff effect” by taking away fiscal support before a full-fledged recovery was underway.
However, while government support schemes continue to be essential, they should “remain targeted towards pandemic-related economic support and avoid giving rise to debt sustainability concerns in the medium term,” De Guindos said.
The ECB has said that its own pandemic stimulus package, which includes a 1.35-trillion-euro emergency bond-buying scheme ($1.6 trillion) to help keep credit flowing, will continue until the “crisis phase is over”.
In the previous edition of its report in May, the Frankfurt-based institution said the risk of the eurozone collapsing could re-emerge as public debt in some countries explodes to cope with the coronavirus shock.
Lagarde at the time, however, said she was “not overly concerned”, and the risk is no longer mentioned in the latest report despite EU leaders bickering over a 750-billion-euro recovery plan agreed in July.
Lagarde last week called for the Next Generation EU fund to become available “without delay”.
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