ECB’s Rehn: See Good Chance Central Banks Will Avert Financial Crisis

16 June 2020

By David Barwick – FRANKFURT (EconoStream) – Central bank actions are likely to prevent the economic crisis from morphing into a financial crisis, European Central Bank Governing Council member Olli Rehn said on Tuesday.

In an interview with Dutch daily de Volkskrant, Rehn urged countries to take advantage of the low-rate environment that will prevail for some time to do their homework, according to a text provided by the Bank of Finland, which he heads.

‘The lesson from the euro crisis was that you have to remove the risk from the market with one blow’, he said. ‘That you have to put in an overwhelming fist to stabilize the financial markets’, as exemplified by former ECB President Mario Draghi’s famous “whatever it takes” speech.

Both the ECB and the U.S. Federal Reserve have applied that lesson, he said.

In addition to the shocks to both supply and demand in the wake of the pandemic, he said, ‘…there could have been a third shock, that of the financial markets, with bank runs, one that hits the economy amidships.’

So far, this scenario has been avoided, owing to the efforts of central banks to ‘nip that financial crisis in the bud’, he said. ‘There is a good chance it will work.’

‘With the right measures we can mitigate the blow and pull ourselves out of the swamp’, Rehn said.

The European Commission proposal of a €750 billion recovery fund consisting of €500 billion in grants and the rest in loans to mitigate the economic fallout from the pandemic is an ‘indispensable building block’, Rehn said.

‘The leaders do well to approve this quickly’, he added. ‘It would take some of the burden that the central banks carry now. It provides a fairer division of labor between monetary aid from the ECB and fiscal policy of the Member States.’

The proposal would be ‘the necessary bazooka to calm the markets and boost the economies’, he asserted.

In the medium term, all countries should work on creating fiscal buffers, he said.

‘Interest rates are now very low and will remain so for a while’, he said. ‘It is highly desirable for euro area countries to use this breathing space to restore their economies and budgets.’