ECB’s de Guindos: Substantial Downside Risks to Economic Recovery

22 June, 2020



By David Barwick – FRANKFURT (EconoStream) – The economic recovery is subject to extreme uncertainty and substantial downside risks, European Central Bank Vice President Luis de Guindos said Monday.

In a speech at the Frankfurt Finance Summit, de Guindos, according to a text provided by the ECB, reiterated the ECB’s willingness to make a further adjustment to its pandemic emergency purchase programme (PEPP).

‘The shape and strength of the recovery are uncertain and this uncertainty will persist for some time’, he said. ‘There are substantial downside risks, in particular if the easing of containment measures turns out to be premature or their impact on productive capacity is more persistent.’ Speed and scale of the recovery are ‘extremely uncertain’, he said.

‘Looking ahead, the Governing Council will continually evaluate whether the size, duration and composition of the PEPP remain appropriate as the economic consequences of the pandemic unfold’, he said.

De Guindos reaffirmed that the ECB’s decisions in March, key among them being the announcement of the €750 billion PEPP, removed tail risk and kept the health and economic crises from turning into a financial crisis. ‘That risk has receded materially since March’, he said.

The Governing Council’s decision at its regular policy meeting on June 4 to increase the size of the PEPP to €1.35 trillion was driven by the risk to medium-term price stability and an unwarranted tightening of financial conditions, he said.

Upside pressure on inflation developments from supply constraints will be overridden by downward pressure from weak demand, he said.

Although euro area governments’ fiscal response to the fallout from the pandemic was ‘absolutely necessary’, he said, it also ‘raises fragmentation issues and will significantly increase public debt.’

In particular, with national measures different in terms of volume and structure, companies and banks could wind up competing unevenly, leading to financial fragmentation, he cautioned. This calls for initiatives at the level of Europe, he said.

‘At the same time, deteriorating economic conditions may give rise to debt sustainability concerns in the medium term, notably in countries with already limited fiscal space’, he said. ‘The increase in public debt levels, while necessary today, needs to be managed in the medium term.’