Stay up-to-date withflow newsbites>
Choose your preferred banking topics and we will send you updated emails based on your selection
Negotiations for the Recovery Fund began a day after the European Central Bank’s (ECB) press conference on 16 July, at which its President, Christine Lagarde, spoke on the monetary policy outlook for Europe.
This was analysed by Mark Wall and colleagues in the 24 July Deutsche Bank Research paper Focus Europe – Warning: Step back from the cliff edge, with the team taking two main messages from the presentation. “First, the ECB is committed to its easy policy stance and to spending the entire Pandemic Emergency Purchase Programme (PEPP) envelope unless there is an unlikely significant upside surprise.” The PEPP, a €750bn asset purchase programme, was first unveiled by the ECB in March and subsequently increased to €1.35trn in early June.
“Second, the ECB warned European fiscal authorities that the economic recovery will not be sustained if temporary policies like the state credit guarantees and furlough schemes are allowed to roll off as planned in several large members states in the second half of 2020.”
The team notes that the ECB’s monetary policy since the pandemic reached Europe is a combination of PEPP and the third of the Targeted Longer-term Refinancing Operations aka TLTR03 and also introduced in March 2020 (TLTR01 dates from June 2014; TLTR02 from March 2016). Lagarde has described TLTR03 as “vastly successful” although “it is only partly influenced by the ECB… and also relies on the state guarantees”. So she sent out a clear message “that an abrupt withdrawal of the guarantees — and other temporary policies — in the second half of 2020 would be a mistake”.
The bottom line, the paper’s authors conclude, is that “the economic recovery is not self-sustaining yet” as the recent signs of recovery may prove temporary and “a continuation of monetary and fiscal policy cooperation is necessary”, which includes costly temporary facilities, such as the furlough schemes (see Figure 2 below).
At the same time, governments are urged to “think about the optimal use of their balance sheets. If an extension of furlough schemes equates to sustaining unsustainable businesses, it might be a better use of fiscal space to support new businesses and new growth, for example, by financing new skills training for the unemployed”.
Figure 2: Current expiration date of Covid-19 related relief programmes