France: Government deploys aid package to contain the impact of the heath crisis
On 17 March, the government announced extraordinary stimulus plans to minimize the blow on companies and consumers from the partial shutdown of the European economy as the continent imposes draconian measures to curb the spread of Covid-19. The package amounts to a total of EUR 45 billion of direct fiscal spending, while up to EUR 300 billion of credit has been guaranteed to businesses. The measures are intertwined with expanded quantitative easing plans announced by the ECB at two successive monetary policy meetings in March. Together, these should sustain vital spending and curtail job losses, while also limiting defaults of small- and medium-sized enterprises (SMEs). Nevertheless, a recession is now all but inevitable and, complicating fiscal sustainability ahead, our panel projects public debt to climb to 104.3% of GDP this year as a result, which is up 5.1 percentage points from last month’s forecast.
The announced fiscal injection aims to support hard-hit sectors of the economy by enabling businesses to defer taxes and social security payments, while also supporting households by expanding unemployment benefits and extending direct cash payments to self-employed workers. Meanwhile, the state guaranteed credits will be bridged to SMEs through commercial banks, with the Bank of France acting as mediator.
Looking ahead, these measures should help keep vital sectors of the economy afloat through the duration of the health crisis. That said, the restrictions adopted by the government to combat the pandemic have made a recession in H1 of 2020 almost inevitable, while lingering uncertainties may spillover into H2 as well. Moreover, the country’s already fragile fiscal conditions are set to deteriorate further, heightening risks of financial turbulence ahead.
Commenting on the fiscal measures adopted by the French government and the prospects for the economy, Julien Manceaux, senior economist for France at ING, noted:
“We believe that these measures will help the French economy to rebound more quickly after the deep recession caused by Covid-19 and reach the third quarter with a limited number of large bankruptcies and hence an unemployment rate far below what a recession of that magnitude could have caused. Thanks to these measures, and based on the hypothesis that the number of Covid-19 cases peaks by mid-April, the GDP contraction could be limited to 1.0%, before rebounding in 2021. The size of that rebound also depends on a recovery in world trade. It is too soon to estimate, but we believe that it should be stronger than our current 1.6% expectation for the eurozone 2021 rebound.”