ECB’s Lane Says Economy in Trough; Data to Improve over Summer

12 May, 2020

By David Barwick – FRANKFURT (EconoStream) – The Eurozone economy has reached a trough and will pick up in the summer months, according to European Central Bank Executive Board member Philip Lane on Tuesday.

In an interview with Dutch daily De Telegraaf, Lane, who is also Chief Economist of the ECB, said that the ECB’s purchases of debt under the Asset Purchase Programme (APP) would cease once the inflation objective had been reached.

Uncertainty dominates, he said, noting the ECB’s various scenarios call for a contraction somewhere between 5% and 12%. “We are now in the trough, but I expect the data to improve over the summer,” he said, even if it remains unclear “whether we return to the situation before the crisis or whether there will be a permanent effect.”

Mindful of the lesson from previous crises that markets can freeze up, the ECB must see to it that there is ample enough liquidity for markets to stabilise, he said.

Asked whether he was concerned about the level of Italian government debt, Lane suggested considering the “overall picture” in which domestically held debt did not necessarily pose a threat.

“Today, the increase in debt in Europe is largely owed to European households: that is a completely different situation to what we saw in the euro area 12 years ago, when the debt was held by foreign creditors: debts then start to weigh on the economy, generating instability,” he said.

The currently low real interest rate is also relevant for the reduced significance of high debt, he noted.

Lane defended as proportionate the ECB’s APP against last week’s criticism by Germany’s Constitutional Court of the bond purchases made under the programme during the euro crisis, arguing that it was launched to counter deflation.

“Inflation is still below our objective, but we have always said that we would remain prudent and patient,” he said. “We only buy a monthly amount that is fixed in advance and we will stop as soon as the inflation aim is reached.”

There is evidence that so-called coronabonds would be greeted with strong demand, Lane said. The debt mutualisation debate during the euro crisis centred on existing debt issued by individual sovereigns, whereas coronabonds would finance debt incurred jointly to address the common problem of the pandemic’s economic fallout of the pandemic, he reasoned.

“If some countries cannot do enough to counter the virus, the entire EU suffers as a result. For many countries, coronabonds would be a cheaper source of financing,” he said. “In the long term, I think that this would result in greater prosperity across the Eurozone.”