Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
The Bank of England has slashed interest rates to a new record low of 0.1 per cent and launched a further £100 billion of money printing to relieve stress in the financial markets. The Bank of England has also had a new Governor installed, Andrew Bailey – though few seem to have noticed this. He has cut interest rates to the lowest in the Banks 326-year history.
This is, however, outscaled by direct fiscal intervention with the State committed to paying the wages for those forced out of work by the Coronavirus – and in particular in the pubs, restaurants and leisure facilities. The Chancellor’s Keynsian measures to help the unemployed and the self-employed, plus additional help for employers, comes on top of the £350 billion package for businesses.
The overwhelming majority of those working in the City are salaried employees who will be well protected by the Chancellors 80 per cent of salaried support (up to the total of £2,500 per month per employee). The group which remains the most vulnerable and needs more support than currently proposed, is the self-employed. They will be able to access Universal Credit at an equivalent rate to statuary sick pay for which employees qualify.
This does not put the self-employed on effectively the same deal as the employed, and the Chancellor was thus lobbied to come up with a parity deal for the self-employed. Late last month, the Chancellor announced a deal for the self-employed under which they can draw an amount equal to 80 per cent of their historic profits, up to £2,500 per month. It is to be hoped that this very generous scheme will be quickly activated. Most SMEs have not got the cash resources to wait to the end of June for the cash support.
Not surprisingly in the wake of the Coronavirus crisis, City deal-doing has for the time being gone on hold, but can be expected to pick up, particularly given the massive Government underwriting of incomes. Financial markets have welcomed the Government’s massive intervention to save jobs and keep the economy afloat.
This has also proved to be a watershed moment for the ECB. The meltdown in vulnerable Bond markets forced the it to issue a E750 billion bond recently, to prevent dangerous debt dynamics from spinning out of control. The ECB is stepping up to its role as a lender of last resort, obliged yet again by fast-moving events to rescue the EU monetary union and indeed the EU project itself, after the failure of EU states to come up with a coherent economic response to Covid l9.
This time round, it is tearing up the rule book entirely announcing that it will not be bound by “self-imposed limits”. It will intervene in the sovereign debt markets wherever needed – meaning that it can deploy its vast arsenal to defend Italy or Portugal. It has vastly expanded the range of assets available, and will do as much as is necessary for as long as is needed. Risks spreads on Italian ten-year bonds, halved after threatening disaster last week.
Under the pandemic emergency purchase programme, the ECB will buy commercial paper and will relax rules to let banks submit small business loans and even letters of credit as collateral. This intervention followed a disastrous week during which Austria’s ECB member stated that the bank had run out of ammunition and could no longer do much to help. The ECB package flouts EU treaty law and may face opposition in Germany’s top Court.
The bank’s president, Christine Laguarde, took the tough decision of forcing through these measures by majority vote. The ECB could no longer wait when Italy’s real borrowing costs had jumped by 170 basis points in a matter of days. A ferocious credit crunch was taking hold. This was happening as analysists began to talk of a 15 per cent contraction in the EU’s GDP in the second quarter. Covid 19 may ultimately raise Italy’s debt to DGP ratio by 20 per cent to over 150 per cent.
While Laguarde has averted the worst, the ECB’s actions are not in themselves stimulus: they amount to a firewall. Monetary policy has no traction against an economic sudden stock caused by lockdowns and factory closures. It will take a vast New Deal of actual spending to lift the region out of Coronavirus slump and head off a deflationary depression.