European Central Bank ready to reload as 'unprecedented' slump hits
FRANKFURT AM MAIN, Germany – With the coronavirus pandemic set to inflict an "unprecedented" peacetime slump on the eurozone economy, European Central Bank (ECB) chief Christine Lagarde said on Thursday, April 30, the institution's trillion-euro response could be expanded and prolonged into 2021.
The ECB's Pandemic Emergency Purchase Program (PEPP), launched last month, "might be extended further than the end of 2020" depending on "the length of the crisis," Lagarde told reporters in a telephone press conference.
The former International Monetary Fund chief and French finance minister also reiterated her longstanding plea for governments to flank the ECB's easy-money policies with fiscal policy, saying "an ambitious and coordinated fiscal stance is critical."
"The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime," Lagarde said.
ECB economists expect output in the 19-nation currency club to shrink by "5% to 12%" this year, she added, saying the size of the contraction will depend on the duration of the confinement measures aimed at curbing the outbreak and the policy responses.
"As containment measures are gradually lifted, these scenarios foresee a recovery in economic activity although its speed and scale remain highly uncertain," Lagarde said.
Output shrinks, unemployment soars
The grim tone came after Eurostat figures on Thursday showed that the locked-down eurozone economy was estimated to have shrunk by 3.8% in the 1st quarter.
Further highlighting how much damage the pandemic has already done to the global economy, Germany announced that its jobless total soared to 2.6 million in April from 2.3 million the month before and France confirmed that it had plunged into recession.
Lagarde said a "sharp downturn in economic activity in April suggests that the impact is likely to be even more severe in the 2nd quarter," with output possibly shrinking 15%.
"In the last 6 weeks, the ECB has been very successful in stopping panic on financial markets and stabilizing banks," economist Marcel Fratzscher of the Berlin-based DIW think-tank commented.
"Unfortunately the ECB's success has taken the pressure off politicians to swiftly implement the necessary European solutions" on the fiscal side, Fratzscher added.
Like the United States Federal Reserve and other central banks around the world, the ECB has unveiled massive stimulus in recent weeks to shore up the economy and keep credit flowing.
That includes the 750-billion-euro PEPP, set to bring the ECB's total asset purchases to around 1.1 trillion euros ($1.2 trillion) this year.
Lagarde called the scheme "the best tool we have in our toolbox," saying governors are ready to "adjust the size and composition" of the scheme if needed.
The ECB's governing council on Thursday kept interest rates at historic lows and rolled out fresh incentives to encourage banks to keep lending to households and firms throughout the crisis.
Measures including negative rates on credit for lenders are "not intended for banks, it's intended for the financing of the economy," Lagarde said.
She called aid to financial firms "an absolute imperative if we want the economies of the euro area to be in a position to resist the extraordinary shock that it is suffering."
The ECB has also eased rules for collateral as part of its efforts to help banks, even accepting some below-investment-grade "junk" bonds.
'Not in the driver's seat'
Asked if it would also consider buying "junk" bonds directly under its asset purchasing schemes, Lagarde said governors had "not discussed it."
"But once again, we are in such uncertain times and there is such a threat to the economic fabrics of our societies that we have to be open-minded and look at all possibilities," she added.
For now, "the ECB has decided to take a short break of reflection to take stock of all recent measures and their possible impact," ING bank economist Carsten Brzeski commented.
Although Thursday's "main focus was on providing cheap and ample liquidity...PEPP will be the main policy tool and there seems to be clear willingness to increase its size if need be."
Beyond that, "the ECB will not be in the driver's seat, fiscal policy will have to do the heavy work," Brzeski said.
"The ECB can only provide financing power for governments and companies." – Rappler.com