ECB’s Schnabel: Recession May Be Milder, But in Line with Baseline

7 July 2020

By David Barwick – FRANKFURT (EconoStream) – The impact on economic growth from the pandemic may be less severe than anticipated, but still seems likely to be consistent with the European Central Bank’s chief scenario, ECB Executive Board member Isabel Schnabel said on Tuesday.

In an interview with Dutch daily NRC Handelsblad, Schnabel, according to a text provided by the ECB, said the ECB would address any major local tightening of financing conditions in the region.

‘In recent weeks some confidence indicators have come in positive, which suggests that the recession could turn out somewhat milder than expected’, she said. ‘But overall we are in the range of our baseline scenario.’

According to its most recent macroeconomic projections, the ECB expects real GDP to decline by 8.7% in 2020 and then rebound by 5.2% next year and 3.3% in 2022.

More important is the question of the medium-term recovery, which also depends on the total policy reaction, she said. ‘A strong European recovery fund is absolutely crucial for Europe as a whole.’

There is a risk, she agreed, that countries harder hit by the pandemic will be slower to recover, leading to further divergence.

The ECB’s pandemic emergency purchase programme (PEPP) seeks to mitigate medium-term inflation risks and the danger of fragmentation, she said. In a crisis, she said, borrowing costs ‘in a country like Italy’ can spike as capital flows toward safe havens like Germany. The ECB would see this as a problem, as its policy must be transmitted throughout the area, she said.

‘By the way, it’s not that we say: Italian or Spanish spreads must not rise above a certain level’, she continued. ‘We don’t want to change’ the fact that sovereign debt yields differ with fundamentals, she said, ‘[b]ut if suddenly, somewhere in the euro area, funding conditions worsen dramatically, then we have to counter this.’