- Europe could lose 15 million jobs without the approval of new equity support, the IMF said Tuesday.
- Loans helped at the start of the pandemic, but firms now need cash aid, the organization added.
- A mix of public and private support worth around 2% to 3% of GDP would fill the economic hole, the IMF said.
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Fiscal relief saved European governments from an even worse COVID-19 recession, but failure to approve additional support could plunge the continent into new economic pain, the International Monetary Fund said Tuesday.
The IMF projects that Europe stands to lose 15 million jobs unless authorities roll out new equity support. Liquidity bolstered by central banks gave European firms easy access to cash and prevented widespread bankruptcies at the start of the pandemic. But today’s problems lie on the equity side of the equation, with businesses’ debts worryingly exceeding their assets, according to the IMF.
Action from the public and private sectors is needed to extend a critical bridge for European firms, the organization said. Committing about 2% to 3% of GDP to equity support can ensure robust firms will avoid insolvency until the broader economy rebounds, the IMF added.
“Healthier firms will create more jobs,” Laura Papi and Alfred Kammer, director of the IMF’s European Department, said in a Tuesday blog post. “Upskilling, training, and job search programs should help displaced workers find new jobs in sectors that are expanding.”
New support should solely focus on businesses that were solvent before the pandemic, they added. While public support is estimated to have addressed 60% of firms’ liquidity problems, the proportion of insolvent businesses is expected to have grown by six percentage points through the health crisis.
Losing 15 million payrolls would be a massive setback for the still-struggling European economy. By comparison, the US is still down 10 million jobs after its own labor-market recovery stagnated through the winter. European countries and the US already racked up unprecedented debts with relief programs earlier in the pandemic. The US largely focused on helping the newly unemployed, while European countries including Denmark and the UK paid workers to stay at home.
Striking the right balance between public and private support is key. The public sector isn’t well equipped to “assess the viability of a large number of small businesses,” the team said, adding public support is “more attractive for bad than good firms.” Targeting support for the businesses that need it most is then critical to avoid wasting government funds, the IMF said.
Banks can then fill in the gaps. Private firms know their clients and their business plans best, and incentivizing private investors to lend a hand helps avoid the moral hazard associated with public support, the IMF said.
Providing the right support to the right businesses won’t just protect millions of jobs. Healthier businesses create more openings, the team said. Investment in support programs for the unemployed can further fill in gaps in the EU’s labor market, they added.
“Upskilling, training, and job search programs should help displaced workers find new jobs in sectors that are expanding,” the IMF said. “This course of action will ensure a strong and lasting recovery after the pandemic.”
The organization’s warning comes as Europe braces for a possible double-dip recession. Luis de Guindos, vice president of the European Central Bank, said Tuesday that first-quarter growth in the region is set to be “relatively weaker than expected.” Second-quarter GDP could also come in below estimates, he said. The EU could then see a “noticeable rebound in activity” if vaccinations trend as planned.