FRANKFURT, July 16 — ECB chief Christine Lagarde today urged EU leaders to do their bit and “quickly” agree on a huge recovery plan, as governors of the central bank held back from topping up their vast pandemic stimulus to the eurozone economy.
Lagarde said that although economic activity in the eurozone had picked up in recent weeks as lockdowns eased, “uncertainty about the overall speed and scale of the rebound remains high”.
The ECB has launched extraordinary measures to cushion the economic blow from the pandemic, but Lagarde reiterated that governments needed to share the load with fiscal policy efforts.
“It is important for the European leaders to quickly agree on an ambitious package,” she told an online press conference in Frankfurt.
European Union leaders are meeting in Brussels on July 17-18 to wrangle over a €750 billion (RM3.7 trillion) fund to help the hardest-hit member states weather the coronavirus crisis.
The fund would be financed through joint EU borrowing and consist mainly of grants.
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.
Lagarde said however that the volume of the fund should not be cut, and she expects grants to make up “a larger proportion” compared to loans.
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 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.
Emergency bond buys
On the eve of the EU’s crunch summit, ECB governors decided to leave key interest rates unchanged.
They also made no tweaks to their virus-fighting bond-buying schemes worth over €1.3 trillion and left massive cheap loans to banks in place.
No changes had been expected after last month’s governing council powwow, when the ECB expanded its pandemic emergency bond-buying scheme known as PEPP by 600 billion, 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 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 per cent in 2020 because of the pandemic, before returning to growth in 2021.
Incoming data suggest a rebound is already under way as countries emerge from lockdown and consumption ramps up, but Lagarde stressed that the recovery was still in its “early stages” and “uneven across sectors and jurisdictions”.
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.
Lagarde however told reporters that unless there were “significant upside surprises, our baseline remains that we will use the entire envelope”. — AFP