Lagarde warns of market turbulences if no quick adoption of recovery fund

ECB President, Christine Lagarde, said that the unprecedented issuance of €750 billion of EU debt to finance the recovery will strengthen the international role of the euro. [© European Union 2020 - Source : EP]

European Central Bank President Christine Lagarde called on member states on Monday (8 June) to urgently adopt the EU recovery plan, saying any delay could create “negative spillovers” in the markets and increase the costs of overcoming the recession. 

Speaking at the European Parliament’s Economic and Monetary Affairs Committee, Lagarde highlighted that “a clear timeline” will give “certainty and confidence” to citizens, businesses and financial markets.

“It will be important to adopt this package quickly”, she told MEPs. “Any delay risks generating negative spillovers and driving up the costs, and hence the financing needs, of this crisis.”

Lagarde welcomed the European Commission’s €750 billion recovery fund proposal, named Next Generation EU, of which €500 billion will be non-refundable grants.

Commission puts forward massive €750bn stimulus against corona-crisis

The European Commission will propose later on Wednesday (27 May) an unprecedented fiscal stimulus of €750 billion, mostly made up of grants that do not need to be reimbursed, to overcome the deepest recession in EU history.

She considered the volume of grants therein “significant”, but argued that “we have to go deeper” with the grant and loan distribution, and see where the money is more needed to deploy the aid quickly, preferably in the form of grants.

In order to finance the recovery fund, the EU would borrow this unprecedented amount in the markets.

Although the ECB cannot buy the recovery bonds directly from the Commission, Lagarde said the central bank could “certainly” buy them in the secondary markets, where investors trade the assets they already own.

In addition, she considered that the record volume of EU debt issuance will also help to strengthen the role of the euro, one of the headline priorities for the EU.

Economists have said that the euro area should progress towards having euro safe assets (such as eurobonds) in order to boost its role as a reserve currency.

The ECB is expected to publish a report this week on the global role of the euro and Lagarde said the single currency has also benefited from the role Europe plays as a “hub” for green finance. 

She said the euro was the main currency of denomination for the issuance of green bonds in 2019.

Proportional response

Lagarde defended once again the ECB’s “extraordinary” response taken to deal with the fallout of the COVID-19. She insisted that the monetary stimulus, in particular the €1.35 trillion pandemic emergency purchase programme (PEPP), is “temporary, targeted and proportionate”.

German court gives ultimatum to ECB on bond-buying programme

Germany’s central bank (Bundesbank) should suspend the implementation of the European Central Bank’s critical bond-buying programme unless the ECB proves the proportionality of its monetary stimulus, aimed at shoring up the eurozone’s economies, Germany’s Constitutional Court ruled on Tuesday (5 May).

MEPs grilled her on the recent German Constitutional Court’s ruling which questioned the proportionality of the ECB’s bond-buying programme, of which PEPP is a customised version launched to respond to the coronavirus crisis.

She replied that the ECB “constantly evaluates whether its policy measures achieve their intended purpose”, including potential side effects or whether other instruments may be more efficient.

In the context of the COVID-19 crisis, she argued that the pandemic bond-buying programme was “the right response” to achieve the ECB’s mandate of price stability and ensure the transmission of its monetary decisions, given the market turbulences and the severe downturn.

Moreover, she said last week’s decision to expand the programme by €600 billion “will prove to have been essential in avoiding an even deeper recession and in quickening our pathway to normalisation.”

ECB doubles down on pandemic response after German ruling

The European Central Bank announced on Thursday (4 June) that it will add €600 billion to its €750 billion bond-buying response against the coronavirus, in its first governing council meeting after Germany’s Constitutional Court ruled against the bank’s asset-purchasing programme.

[Edited by Zoran Radosavljevic]

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