The World Health Organization has declared the coronavirus outbreak a pandemic as the UK and Germany stepped up efforts to limit the fallout from disease.
Angela Merkel vowed to do “whatever is necessary” and signalled that Berlin was ready to show flexibility on its longstanding commitment to balanced budgets. The Bank of England slashed interest rates and the UK government unveiled a £12bn fiscal stimulus.
Economists have warned that the economic shock of coronavirus could be similar to the 2008 financial meltdown and the subsequent eurozone crisis. “We will not ask ourselves every day what this means for our deficit. This is an extraordinary situation,” Ms Merkel said.
Her comments came just hours after a group of prominent German economists called on her government to soften its resistance to budget deficits and new borrowing in the face of the pandemic.
In the UK, the Bank of England made an emergency cut to interest rates and incentivised banks to lend more in a wider package of measures designed to counter the shock of the coronavirus outbreak on the UK economy.
The BoE reduced its main rate by half a percentage point to 0.25 per cent. Combined with a Budget on Wednesday that will sharply increase public borrowing, the move underlined the intent of the BoE and the UK government to fight the economic effects of the outbreak “in concert” with “timely and powerful” measures, said Mark Carney, the outgoing bank governor.
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Forecasters have warned the spread of the virus could drive the eurozone into a recession but there is growing frustration in some quarters that the ECB is being left to shield the bloc from an economic and financial crisis.
Speaking on a video call with EU leaders on Tuesday night, Christine Lagarde sought to shake them out of what she sees as a complacent attitude to the disease, according to a person briefed on her comments.
The calls for action come as the ECB prepares to meet on Thursday to consider its monetary policy response to the virus. Financial markets are betting that the central bank will announce a further cut in its deposit rate to minus 0.6 per cent — following the emergency rate cut by the BoE and last week’s rate cut by the US Federal Reserve — and an expansion of its programmes of bond purchases and cheap loans to banks.
The European Commission on Tuesday said it was creating a €25bn investment fund to tackle coronavirus, to be paid for from existing resources. It also promised to loosen state aid and budget rules to allow governments to help struggling businesses and boost public spending.
Additional reporting by Ben Hall
