ECB’s Lagarde: Euro Area Economies Facing a Major Shock

12 March 2020

12th March 2020 By David Barwick - FRANKFURT (EconoStream) – Economies around the world, including those of the Eurozone, face a severe shock as a result of the coronavirus, European Central Bank President Christine Lagarde said Thursday. Speaking at the press conference following the ECB’s latest monetary policy decision, Lagarde encouraged a concerted response based on fiscal policy, though she also made clear that the ECB would take steps beyond those decided by the Governing Council today, if the situation were to warrant it. “The economies of the world and certainly the economies of the euro area are facing a major shock,” she said. The outcome “will depend upon the speed and the strength and the collective approach that will be taken by all players.” Above all, fiscal authorities are called on to act, she said, urging “ambitious and coordinated” measures to counter downside risks in conjunction with the virus. Although a “severe” shock is unavoidable, it would still be temporary “if the right set of policy measures are decided by all players,” she said. “The economy will then bounce back,” she said, even if “the exact timing of that is uncertain.” Lagarde defended repeatedly the ECB’s failure to cut interest rates in favor of a range of other measures including additional net asset purchases and refinancing operations. Avoiding any outright admission that some members of the Governing Council had pushed for an even more far-reaching set of policy steps today, Lagarde emphasized the unanimity of the outcome of the meeting, participation in which was partly virtual. “We actually had a unanimous decision on the various elements of the package,” she asserted. “This unanimous decision was clearly determined by the fact that we have the most efficient, best targeted and most focused set of tools.” Rejecting the notion that a rate cut would have been appropriate, Lagarde called the additional net asset purchases in the amount of €120 billion until the end of the year to be “the most efficient response.” Moreover, the Governing Council would “make use of all the flexibilities that are embedded in the framework of the asset purchase program,” converging toward the capital keys at the end of it. As for the ECB’s preference not to follow other major monetary authorities by reducing official borrowing costs, Lagarde said that the Eurosystem’s policy stance was not determined “on the basis of currency variations…the key issue is to face the fundamentals of the economy and to make sure the liquidity risk doesn’t materialize.” In her introductory statement, Lagarde said the ECB would continue to be alert to the economic fallout of the coronavirus and “stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.” She echoed this during the ensuing question-and-answer session. She made clear that the ECB staff macroeconomic projections for the euro area were, at least for the near term, “partly outdated” as a result of a cut-off date that preceded the most recent surge in European coronavirus cases. The strategic review the ECB had envisioned undertaking this year was “clearly deferred for the moment,” she said, with the timeline now an open question.