European Central Bank deploys stimulus to ease virus damage
ECB President said the economy was facing a "major shock"
FRANKFURT — The European Central Bank deployed targeted new stimulus measures to cushion the shock to the economy from the virus outbreak, but its president said monetary policy couldn’t do it alone and called for a “decisive and determined” response from governments.
ECB President Christine Lagarde said the economy was facing a “major shock” and that the central bank measures unveiled March 12 were “almost surgically” targeted at areas where monetary policy could help.
The central bank, she said, was “determined to support households and firms in the face of the current economic disruptions and heightened uncertainty.”
But she added that a stronger response from eurozone governments was urgently needed to prevent the eurozone from falling into recession: “An ambitious and co-ordinated fiscal policy response is required to support businesses and workers at risk.” She said action should come “in the next few weeks and not months.”
She repeated the phrase at the start of her statement, and when asked if the eurozone faced a recession, said that depended “on the speed, the strength of the collective approach” by all players. She said currently announced fiscal measures were only 27 billion euros, or about a quarter of 1% of GDP.
The bank’s 25-member governing council decided a stimulus package that included the purchase of up to 120 billion euros (US$132 billion) more in bonds this year.
The money is newly created and injected into the financial system. It comes on top of purchases worth 20 billion euros a month it is already carrying out, and would be aimed at corporate bonds, which should help keep credit available to companies.
Financial markets continued to slide after the ECB’s announcements, with the Stoxx Europe 600 index falling 11.5% — its worst day ever — amid global concerns that authorities can do little to ease the damage wrought by the virus outbreak
Holger Schmieding, chief economist at Berenberg bank, said that “the adverse market reaction may not be just a market verdict on the ECB’s package… It could also reflect a growing realization that monetary and fiscal policy cannot be the genuine circuit breakers in a medical emergency. ”
Schmieding said Lagarde committed a “communications mishap” with a remark that it was not the ECB’s business to hold down gaps in borrowing costs among eurozone member governments. The gaps, or sovereign spread, increased in response and Lagarde later made what appeared to be a clarifying remark that high spreads “clearly impair” the bank’s monetary policy.
The European Central Bank said it was also providing more cheap, long-term loans to banks to make sure they have the liquidity they need. And the ECB will temporarily ease some capital requirements for banks to help them keep lending. It’s all aimed at helping businesses get the financing they need and stimulating activity to offset the downturn from all the closings and restrictions due to the virus outbreak.
The central bank did not cut interest rates as many analysts had expected. Rates are already low and economists have said deeper cuts might not help much.
Thursday’s steps “will do no more than cushion the blow to the economy from the coronavirus,” said Andrew Kenningham, chief Europe economist at Capital Economics. “Monetary policy is powerless to prevent a deep downturn and, unlike in the U.S. and China, it has little scope to support the recovery afterwards.”
The move comes as the eurozone is forecast to slide into recession and financial markets keep falling over concerns about the virus outbreak’s hit to the economy. Concerns deepened after the U.S. decided to halt travel from 26 European countries.
The bank’s policy meeting was held without several members of the 25-seat governing council physically present and participating by remote conferencing. Italian central bank head Ignazio Visco was among them since his country, so far the hardest hit in Europe by the virus outbreak, has restricted movement.
Economists are saying that the impact of the virus outbreak is difficult to address with monetary policy, since it first and foremost deals a shock to the supply of goods and services. Monetary policy is better equipped to stimulate demand, not supply, by making credit more widely available.
Central bank action is aimed instead at limiting the damage from knock-on effects of business interruption. More abundant and targeted credit could help businesses get through a period of interruption without going out of business.
The Bank of England cut its key benchmark to 0.25% from 0.75% on March 11; the U.S. Federal Reserve cut its benchmark by a half-percentage point to 1.0-1.25% on March 3.
Governments have announced some limited measures of fiscal support. Italy is earmarking 25 billion euros ($28 billion) in new spending and Britain said it would make 30 billion pounds ($39 billion) available.
The government of Chancellor Angela Merkel has decided to make it easing for companies to put workers on shorter hours, with government assistance. That could help firms rebound after the outbreak passes because they will have avoided layoffs.
Yet European rules limiting debt and deficits for members of the euro currency may restrict what governments can do. European Commission President Ursula von der Leyen has said that the maximum flexibility available in the rules will be applied.
The commission has started a longer-term review of the rules themselves, but economist Rosie Colthorpe at Oxford Economics said any changes would not come before 2021. “This leaves the eurozone ill-prepared to deliver a forceful and co-ordinated fiscal response to the looming coronavirus-related downturn.”
“There is a chance that a serious recession would trigger meaningful reform, but for now the onus will remain on the ECB, despite its increasingly depleted arsenal,” Colthorpe said.