(Bloomberg) —

European Central Bank President Christine Lagarde told the region’s leaders that the euro-area economy could shrink by as much as 15% as a result of the pandemic, and that they risk doing too little, too late, according to three people familiar with the remarks.

Lagarde spoke during a video meeting of the European Union’s 27 heads of government, who are discussing how to mitigate the economic fallout of the virus. One of the officials, who asked not to be identified because the deliberations are private, said the 15% figure was the extreme scenario, with the ECB president saying her baseline estimate is a 9% cut in output this year.

German Chancellor Angela Merkel, who spoke to her counterparts after Lagarde, vowed to back a huge stimulus package for Europe. European stocks, Italian bonds and the single currency all rose.

The Stoxx 600 share index gained as much as 1.57%; the single currency reversed losses against the dollar and was up slightly at $1.0838 after falling as much as 0.6%; Italy’s 10-year yield fell as much as 15 basis points to 1.93% before paring the move.

With more than 100,000 fatalities in the region, Europe has been hard hit by Covid-19 and the fallout from the crisis is tearing at the fabric that holds the group of nations together. Strict lockdowns have shuttered factories and halted travel, pitching the trading bloc into the worst recession in living memory.

European Commission President Ursula von der Leyen told leaders that not even in World War II there was such deep contraction in output as the one expected this year and only in the Great Depression would they see anything of similar magnitude, according to two officials. But beyond the average figure, both the depth of contraction and the speed of recovery will be very uneven due to differences in fiscal space among countries, distorting the level playing field in the bloc’ single market, von der Leyen warned.

The commission, the bloc’s executive arm, has floated a 2 trillion-euro ($2.2 trillion) plan for economic recovery that would rely heavily on the EU’s budget, according to a draft copy of the proposal obtained by Bloomberg. The plan would include the EU borrowing 320 billion euros on the capital markets and then channeling the proceeds to member states hit the worst.

Story continues

French President Emmanuel Macron told the other leaders that that any aid would need to be grants, not loans, which would just contribute to member states’ debt load, according to two officials

Economic data on Thursday illustrated how the recession is turning out worse than many early predictions. Measures of private-sector business activity plunged more than expected to an all-time low, and signaled record job cuts. Corporate and consumer confidence slumped in the bloc’s biggest economies.

So far most fiscal action has been by national governments, raising fears among investors that an uneven response will tip the currency area into another financial crisis later on.

France, Spain and Italy have called for the EU to introduce joint debt sales but governments such as Germany and the Netherlands have rejected so-called coronabonds over fear that they’d be stuck with the bill. There is also disagreement over who how to share the costs of the recovery, and under what terms the pooled funds would be disbursed.

The ECB has led the European-level response, pouring liquidity into the financial system and taking steps to ensure the cash can reach deep into the euro zone.

It has pledged to buy more than 1 trillion euros of debt over the rest of this year, and removed most of its self-imposed limits to allow it to target areas of market such stress such as Italian bonds. It has ramped up programs making it easier for banks to lend to virus-hit companies, including accepting some junk-rated debt as collateral.

The call continues.

(Updates with markets in the fourth paragraph and summit details throughout.)

For more articles like this, please visit us at bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2020 Bloomberg L.P.

Source link