ECB’s de Guindos: Recovery’s Shape “Somewhere Between a V and a U”

12 April 2020

12th April 2020 By David Barwick - MADRID (EconoStream) – The euro area economy will follow something between a V- and a U-shaped trajectory through the pandemic and into a recovery from the third quarter of this year and above all next year, European Central Bank Vice President Luis de Guindos said in a newspaper interview on Sunday. Speaking to Spanish daily La Vanguardia, de Guindos avoided a direct answer to the question of whether the ECB’s actions since the start of the crisis had been enough. De Guindos noted the calculations of international organizations, according to which economies would contract on the order of 2% to 3% per month of shutdown, which he suggested would imply a 5% decrease in euro area GDP in the event confinement lasted for 1.5 months. “In the euro area, the most likely scenario is that we will see some signs of growth starting in the third quarter, but we will have to wait until 2021 to see a genuine recovery in economic activity,” he said. “In any case, 2021 will not be able to make up for all of the downturn in 2020. I think the shape of the recovery will be somewhere between a V and a U, but we have to remember that everything will depend on the length of the economic shutdown imposed by the fight against the pandemic.” Spain would experience a relatively sharp contraction as its economy depends heavily on sectors impacted more severely by the pandemic, he said. Asked whether the measures taken by the ECB since the start of the crisis had been enough, de Guindos merely recounted monetary authorities’ various steps, observing that the central bank would purchase assets this year to the tune of €1.1 trillion “to avoid fragmentation of the euro area,” which he called “the main financial shield for Spain and the other euro area countries.” Public budgets would require additional funding of between €1 trillion and €1.5 trillion as a consequence of the crisis, he said. The debt they would issue to cover these needs is “precisely why the ECB’s intervention in the bond markets aims to avoid fragmentation at an extremely difficult time,” he said. De Guindos said the possibility of the ECB simply forgiving this debt was “not a scenario I’m considering,” given that debt levels are sustainable and economies will eventually return to normal. “We are not looking at any scenarios where this debt is a problem,” he said. As to the recent agreement by the Eurogroup, according to which the European Stability Mechanism would finance healthcare spending by member countries in the amount of up to 2% of their national GDP, “the most important part of this agreement is that it represents a commitment that points in the right direction,” he said. In addition to being a clear indication of Europe’s readiness to respond jointly to the challenge of the pandemic, the measure complements both national fiscal stimuli as well as the “rapid and powerful intervention by the ECB since the start of this crisis,” he said.