Europe and Japan Unveil New Stimulus Proposals

  • EU exec branch unveils €750 billion stimulus proposal
  • Recovery fund needs approval of all 27 countries in the bloc
  • Japan's government set to increase coronavirus aid to 40% of GDP

2020 has been strange in many ways. Instead of holidaying in Europe this summer, investors are waiting on news about recessions and stimulus spending that will help the continent recover from the COVID-19 pandemic. Christine Lagarde, the European Central Bank (ECB) president, said during a press conference webcast today that the eurozone or euro area economy will likely shrink this year according to the "medium" or "severe" scenario forecasts i.e. 8% to 12%. She called the "mild" scenario, a contraction of 5%, "out of date." The ECB announced in March a 750 billion euro asset purchase program and removed buying limits for individual member states. It's expected to announce more stimulus at its next policy meeting on June 4.

For now the focus is on the European Commission, the executive branch of the European Union, which today presented its much-awaited coronavirus-related stimulus package. The recovery fund dubbed "Next Generation EU" includes €500 billion in grants and €250 billion in loans for member states, with the money borrowed on financial markets and repaid from the bloc's budget. Since this would mean sharing the cost of the pandemic, with Italy and Spain as the biggest beneficiaries, it is considered a watershed moment for the bloc (some have even called it Europe's Hamilton moment).

Talking about taking a new bold step together toward collective recovery, President of the European Commission Ursula Von Der Leyen in her speech emphasized on unity and said a struggling economy in one part of Europe weakens an economy in the other part. France and Germany, two financial powerhouses with significant sway, had backed a similar plan. 

As is the case with most EU plans, this is seen as too little by some and too generous by others in the 27-member bloc. The backing of all will be required for it to be enacted. The "Frugal Four" members, Austria, Denmark, the Netherlands and Sweden, are against joint debt and want the aid to be in the form of loans instead of grants. The STOXX Europe 600 index was up almost 1% as the announcement was made. 

Source: Schwab Research.

Image courtesy: Schwab Research

Japan Announces $1.1 Trillion in New Spending

Over in Japan, the cabinet approved Prime Minister Shinzo Abe's plan for stimulus spending of $1.1 trillion today and parliament is expected to pass it before June 17. It will include money for businesses, health care assistance and local governments. This new plan and previous coronavirus measures are worth $2.18 trillion or 40% of the country's GDP. Japan slipped into a recession in the first quarter – the economy shrank 3.4% from the previous quarter as exports and consumer spending plunged. It lifted a state of emergency recently.

In the U.S., it's currently just the sound of crickets heard on the fiscal stimulus front. The giant $3 trillion HEROES Act passed in the House is not expected to be approved in the Senate. Senate Majority Leader Mitch McConnell said yesterday whether another bill is needed will be decided in the next few weeks.

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