The European Central Bank decided on Thursday (12 March) to inject more money into the real economy to combat the economic fallout of coronavirus. As markets continued to plunge, the bank’s president Christine Lagarde stepped up pressure on member states to pass an “ambitious and collective” fiscal stimulus.
In an unusual meeting, where half a dozen eurozone central bankers participated by phone due to coronavirus concerns, the ECB Governing Council approved a new series of cheap loans to banks, known as long-term refinancing operations (LTROs) and eased conditions on an existing “targeted” lending programme.
In addition, the ECB will add an extra €120 billion to its asset-buying programme this year on top of the present €20 billion per month.
However, the bank did not cut interest rates further, despite investors’ expectations, as markets remained in free fall.
Lagarde warned that the coronavirus COVID-19 represented “a major shock” for the global and eurozone economies. Despite its “temporary nature”, she said it would affect both the supply and demand side, while it already created uncertainty and high volatility in the markets.
As a result of the pandemic, the ECB cut its growth forecast for the eurozone to 0.8% for 2020 and 1.3% for 2021, compared with 1.1% and 1.4% included in the previous forecast.
But Lagarde noted that this forecast was “partly outdated” as the cut-off date for the projections was around two weeks ago, before Italy became the hardest-hit nation after China and more aggressive measures were adopted by euro area members to contain the coronavirus.
Asked if there could be a recession in the eurozone, Lagarde said it would depend on the speed and strength of the collective response of all actors, primarily governments and EU institutions with budgetary powers.
For that reason, she repeatedly stressed that she hoped the EU finance ministers would adopt an “ambitious and coordinated” fiscal response when they meet on Monday.
“I’m particularly worried about… the complacency and slow-motion process that would be demonstrated by the fiscal authorities of the euro area in particular,” Lagarde told reporters.
She explained that all the fiscal measures announced by eurozone members to date amounted to €27 billion, which is around 0.25% of the eurozone’s GDP.
This excluded the European Commission’s €7.5 billion of unused structural funds allocated to the coronavirus crisis and Spain’s economic package of €14 billion, announced on Thursday afternoon.
“I very much hope that, at the Eurogroup, there will be a decisive and determined move in the direction of this ambitious and collective response that we are calling for,” she insisted.
In contrast to the opposition by a strong group of governors to the last round of monetary easing in September, Lagarde highlighted that the latest decisions were adopted by unanimity.
However, the ECB’s package had little effect on the markets, as investors continued to sell off in light of the unsatisfactory response to the pandemic given by decision-makers.
Stock markets in Europe registered on Thursday the biggest daily loss in history. The EU-wide Stoxx 600 fell by 11% at the close of trading, while Milan’s stock exchange closed 17% down.
Lagarde argued that it “takes a little bit of time” for the markets to assess the monetary decisions and appreciate them.
But she provoked more nervousness among bond traders as she said the ECB was “not here to close spreads”, in a reference to the increasing cost of selling some national obligations, in particular Italian debt.
In order to calm down the markets, she later spoke to CNBC to clarify that she was “fully committed to avoiding any fragmentation in a difficult moment for the euro area.”
“High spreads due to the coronavirus impair the transmission of monetary policy,” she added.
She explained that the ECB would use the full flexibility allowed by the bond-buying programme, reinforced on Thursday, to “avoid dislocations in bond markets”.
No decision expected
Despite Lagarde’s high hopes for the adoption of an “ambitious” fiscal stimulus by the ministers on Monday, sources close to the eurogroup watered down the expectations of such move.
“It is not the moment to make a decision,” said a source of the Spanish economy ministry.
The same official added that only one or two countries are asking for such ambitious fiscal stimulus, a reference to France and Italy.
Spain is in favour of a fiscal stimulus but warns that it needs to be properly designed to avoid “irresponsible” behaviours by the capitals that could hamper the eurozone’s budgetary stability.
Despite being one of most affected countries by the coronavirus, Madrid’s stance brings the coalition of Socialists and left-wing Podemos closer to the fiscal rectitude of Northern countries, especially the Netherlands and Germany.
Instead, the Spanish government hoped for bigger fiscal support from the European Commission and the European Investment Bank.
“So far, it hasn’t done enough”, the Spanish official said of the EIB.
Sources close to the EIB told EURACTIV that the bank was preparing a package of measures that was expected to be announced in the next few days.
A board meeting scheduled for Thursday was cancelled as one of the EIB staff members was diagnosed with coronavirus. The adoption of the package was going to take place by written procedure.
[Edited by Zoran Radosavljevic]