ECB President Christine Lagarde’s keynote address at the ECB forum on Central Banking focused on how Covid-19 has given rise to a “highly unusual recession” and a “similarly unsteady recovery” and the ECB’s policy response to this. She described the latest news on the vaccine as encouraging but warned that until widespread immunity is achieved cycles of “viral spread and tightening restrictions” remain likely and that “the recovery may not be linear, but rather unsteady, stop-start and contingent on the pace of vaccine roll-out. In the interim, output in the services sector may struggle to fully recover.”
In terms of monetary policy’s role in responding to this, she noted the ECB’s Governing Council would respond to the unfolding situation “to ensure that financing conditions remain favourable to support economic activity and counteract the negative impact of the pandemic on the projected inflation path.” She added in coming weeks they would have more information on which to base a recalibration decision including vaccine rollouts, the effectiveness of the lockdown measures in containing the virus and updated macroeconomic projections. On specific policy measures, she stated: “While all options are on the table, the PEPP and TLTROs have proven their effectiveness in the current environment and can be dynamically adjusted to react to how the pandemic evolves. They are therefore likely to remain the main tools for adjusting our monetary policy.”
Christine Lagarde also emphasised the importance of fiscal policy in the stabilisation effort and there have been some developments on this front too. Earlier this week, EU Council negotiators reached an agreement with the Parliament on details of the EUR1.8tn package made up of the EU Recovery Package (EUR750bn) and the Multiannual Financial Framework (MFF) of EUR1.1tn. Agreement was reached on the size of the MFF with the provision of some additional funding (EUR15bn) for priority programmes to be funded from competition fines and some reallocated spending. Last week agreement was also reached on a mechanism to link the rule of law to the disbursement of EU funds. These measures still need formal approval from the Council and Parliament and the Own Resources Decision, enabling the commission to borrow, will also need ratification from member states.
Certainly, there is need for a continued and concerted effort on the policy front in Europe as the second wave or coronavirus paralyses the economy. Paolo Gentiloni, EU Commissioner for the Economy, in an interview with the FT warned that a ‘V-shaped recovery’ was an ‘illusion’. In discussing the suspension of the debt and deficit targets and the extension of the fiscal escape clause for 2021 he noted this will be reviewed to decide if an extension is necessary in coming months, and that the “European Fiscal Board’s proposal to use a pre-crisis level of real GDP of the euro area and EU as a reference certainly has merit”. His message to member states was to continue to support their economies.