Services sector craters as the EU searches new funding

Services sector craters as the EU searches new funding

The coronavirus pandemic is hitting European economies sharply, with the latest economic data showing massive falls in services activity across the region.

In Italy, the services industry dropped in March at the fastest rate since the IHS Markit survey began in 1998. In Germany, the services sector laid off staff at the steepest rate in about 23 years. In Spain, services activity contracted for the first time in six-and-a-half years.

The data released Friday showed the final Composite Purchasing Managers’ Index — which includes services and manufacturing — for the whole euro zone crashed to a record low of 29.7 in March, from 51.6 in February. This was the biggest monthly fall since the survey began.

Chris Williamson, chief business economist at IHS Markit, said that “with various countries stepping up their measures to contain the spread of the coronavirus,” the final numbers were “no surprise.”

“The data indicate that the euro zone economy is already contracting at an annualized rate approaching 10%, with worse inevitably to come in the near future,” he added.

The gloomy picture adds further pressure on European leaders to address the economic consequences of the coronavirus. The pandemic, which emerged in China in late 2019, has spread all over the world and brought all major economies to a halt. In most European countries people have been stuck at home for weeks, only allowed outside to purchase groceries and medicines.

“Time is of the essence here, that’s why we are working day and night, all the countries of the Eurogroup and all of the countries of the European Union, to find a package by next Tuesday that is credible and can be implemented fast,” Pierre Gramegna, finance minister of Luxembourg, told CNBC’s “Squawk Box Europe” Friday.

European nations have been at odds on how to address the current crisis. Southern European countries want the group to take bold steps and go as far as issuing joint debt to finance the costs of the crisis, so-called “corona bonds.”

However, northern EU capitals, traditionally more fiscally conservative, are reluctant to go that far and prefer developing loans with conditionality attached.

Gramegna, a vocal supporter of common debt issuance, said the EU “will come up with good ways of ensuring liquidity to all countries.”

Southern countries argue that the crisis is hitting every country and therefore all the EU member states need to come together and help each other financially.

Valdis Dombrovskis, an executive vice president at the European Commission, said Friday that the pandemic is a “major challenge for the European Union, among other things because it is a symmetrical shock.”

“We should be responding in a spirit of European solidarity and coordination,” he added.

The northern-southern split witnessed over the last few weeks has resurfaced concerns over anti-EU sentiment. The bloc has recently lost one of its members with the U.K. halting its membership on January 31.

To overcome, to some extent, the ongoing divisions, the European Commission proposed Thursday a 100 billion euro ($108 billion) fund to support Italy, Spain and other countries hit by the pandemic. The idea is to tap financial markets and use that money to prevent high levels of unemployment in the region.

In the meantime, the EU has also scrapped its fiscal rules, to allow countries to spend more during this crisis; it has set up a 37 billion euro ($40 billion) investment fund to support businesses all over Europe, and relaxed state aid rules.

However, the biggest financial help has been from the European Central Bank. The institution is buying 750 billion euros ($813 billion) in European bonds until the end of the year – an announcement that has lowered the costs for European governments in financial markets. 

“The good thing is, in this very difficult period, that interest rates are very low, so I think a lot of this will be handled through loans,” Gramegna told CNBC.

“We also know the European Central Bank is ready to buy up sovereign loans in huge quantity and the ESM (European Stability Mechanism) has 410 billion euros ready to be used,” the Luxembourg finance minister said.

The 19 finance ministers of the euro zone are due to meet on Tuesday.

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