ECB reticent as EU drafts pandemic recovery plan

The ECB has taken unprecedented action against the coronavirus pandemic so far to mitigate its effects on the region's economy which faces a steep economic downturn. As EU leaders flesh out a huge coronavirus recovery plan to help the crisis-hit region , European Central Bank governors are expected to refrain from doling out cash to aid recovery.

EU recovery plan

European Central Bank governors are expected to refrain from doling out fresh stimulus medicine Thursday, hoping EU leaders will do their bit to shore up the crisis-hit region with a huge coronavirus recovery plan.

The ECB has taken unprecedented action to cushion the economic blow from the pandemic, which has left the eurozone facing its worst downturn since World War II.

Recovery plan: kick-starting a battered EU economy 

ECB chief Christine Lagarde hinted last week that the governing council would take a breather to gauge the effectiveness of its measures so far.

“We have done so much that we have quite a bit of time to assess (the latest data) carefully,” she told the Financial Times.

The ECB meeting comes on the eve of a July 17-18 European Union summit in Brussels where leaders will wrangle over a proposed 750-billion-euro ($847-billion) recovery fund to kickstart the bloc’s battered economy.

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Lagarde, who has repeatedly urged governments to underpin central bank efforts with fiscal policy, has called the plan a potential “game changer”.

The fund for the recovery plan would be financed through joint EU borrowing and consist mainly of grants for the hardest hit member states.

But the proposal is fiercely opposed by Denmark, Sweden, the Netherlands and Austria who want to rein in the spending and insist on loans rather than grants, making agreement this week uncertain.

Crucially, the fund has the backing of German Chancellor Angela Merkel whose own government has ditched its no-new-debt dogma to unleash 130 billion euros in fiscal stimulus for Europe’s top economy.

In Washington, the International Monetary Fund urged governments not to let up, as “the costs of premature withdrawal are greater than continued support where it is needed,” its chief Kristalina Georgieva wrote in a blog post.

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With the focus on national capitals, “don’t interrupt your vacation for the next ECB meeting,” ING bank analyst Carsten Brzeski told.

“It’s all about fiscal policy and the summit on the European recovery fund.”

EU recovery plan

At last month’s governing council meeting, the ECB expanded its pandemic emergency bond-buying scheme known as PEPP by 600 billion euros to 1.35 trillion, and extended it until June 2021.

The goal of the government and corporate debt purchases is to keep credit flowing and encourage spending and investment in the 19-nation eurozone.

It comes on top of the bank’s already ultra-loose monetary policy of historically low interest rates, cheap loans for banks and a pre-pandemic bond-buying scheme to the tune of 20 billion euros monthly — all designed to bolster economic growth and push up stubbornly low inflation.

The ECB said in June it expected the eurozone economy to shrink by a record 8.7 percent in 2020 because of the pandemic, before returning to growth in 2021.

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Incoming data suggest a rebound is already under way as countries emerge from lockdown and consumption ramps up, but the speed and strength of the recovery remains uncertain.

Lagarde told the FT that the virus-fighting measures taken by the ECB so far have “demonstrated their efficiency, their effectiveness”.

Capital Economics economist Jack Allen-Reynolds said he expected Lagarde “to emphasise that the bank will do more if needed” amid growing fears of a possible second coronavirus wave.

Managing expectations for EU’s future  

The ECB’s next economic growth and inflation forecasts are due in September and policymakers will probably wait until then before deciding on further action, observers say.

“Monetary policy should remain accommodative where output gaps are significant and inflation is below target,” IMF chief Georgieva urged.

ECB board member Isabel Schnabel appears to have started managing expectations for later in the year by suggesting that the bank may not use up its full PEPP envelope, and Lagarde can expect to be grilled on the remark on Thursday.

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She may also be quizzed on her reaction to the resolution of a long-simmering row in Germany about the ECB’s sovereign bond purchases, which spiralled after the country’s highest court questioned the legality of the stimulus scheme in May.

German lawmakers ended the spat by adopting a resolution earlier this month saying they were satisfied the ECB had demonstrated the scheme’s “proportionality”.

AFP with additional input by GVS News Desk

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