EU faces brutal choices over coronavirus corporate rescue money
Member states will need to decide which companies to support and which to allow to fail
Early in the coronavirus crisis, it became abundantly clear that EU member states were going to have to pump vast sums of money into keeping their corporate sectors afloat as the pandemic forced economies into deep freeze.
That life support cannot be kept in place indefinitely. And deciding how and when to pare it back could prove to be a lot more complicated — and politically explosive — than implementing it in the first place.
With the European Commission predicting “light at the end of the tunnel” for the EU economy, finance ministers are preparing to open a debate on how this process should be handled. The topic is set to feature when the eurogroup meets on Monday.
No one is talking about yanking corporate support measures soon. Europe is still under lockdowns and cross-border movement is severely restricted.
As a commission note to be discussed at the eurogroup put it, an “abrupt and uncoordinated withdrawal” of support measures could trigger a wave of bankruptcies and cause lasting economic and social damage. Instead, as broad corporate support measures expire, “there will gradually be a need to replace them with more targeted schemes”.
But economic activity is forecast to return to pre-crisis levels midway through next year. Governments will need to start preparing for some difficult choices when it comes to state support programmes.
They do not want to let sound businesses go under. But as one EU official said, “companies that are fundamentally unviable should be allowed to fail at some point”.
This will involve difficult judgments as to how Covid-19 has changed the structure of EU industries, determining which sectors have a bright outlook and which will never be the same again. The story will vary sharply from country to country, once again highlighting the risks created by divergent economic fortunes within the member states of the euro currency area.
The Darwinian task of figuring out which companies will be viable in the long term may involve governments bringing in private sector specialists to sift through the numbers, something some capitals have already started to consider.
It will also have implications for the banking sector, which has thus far been spared a surge in non-performing loans by massive public support schemes.
The share of corporate NPLs in the euro area stood at 5.23 per cent of total loans in the second quarter of last year, marginally lower than the previous quarter, according to the commission note. Bankruptcy numbers have remained contained.
But “once the unprecedented public support measures expire, a number of businesses are likely to default on their debt obligations, leading to higher NPLs and insolvencies”, the note warns.
The commission will play a critical role in all this. Brussels has waved through more than €3tn of exceptional state aid measures during the crisis, according to commission data. Germany, Italy, France and Spain accounted for the biggest shares.
But at some point, Brussels will need to start tightening up as part of a transition back to more normal regulatory conditions.
Officials note the state aid regime was relaxed in the battle against Covid-19, serving as a “bridge” to help companies survive — not prop them up indefinitely. So far, the commission has shown flexibility, adjusting the rules five times, with an extension pushed through last month. “We don't have a crystal ball, and we keep monitoring the situation,” said one official.
But the current regime of massive corporate support from the taxpayer cannot last for ever. “This is going to be a difficult judgment,” said another official. “I don’t think anyone sees the current corporate support measures as a desirable long-term element of the European Union.”
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