ECB’s Panetta: Recovery Requires Continued Strong Monetary Stimulus

27 July 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank must continue to shore up the economic recovery with a high degree of monetary accommodation, ECB Executive Board member Fabio Panetta said Monday.

Speaking in an interview with Italian daily la Repubblica, a text of which was made available by the ECB, Panetta said the ECB’s pandemic emergency purchase programme (PEPP) was effective and that the entire volume would be deployed unless developments were significantly better than expected.

It remains ‘too soon to declare victory’, Panetta said. Although ‘[r]ecent data certainly indicate that we’re making progress’, these improvements are simply part of ‘the rebound that was to be expected’ after the preceding collapse and the robust policy reaction, he said. As developments have been consistent with projections, ‘they don’t give us sufficient grounds for satisfaction’, he added.

Output won’t return to pre-pandemic levels before the end of 2022, he reminded, noting as well the uncertainty of the outlook, the risk of a second wave of the pandemic and the unevenness of the recovery. With respect to the latter, greater divergence across the area is ‘the last thing we need’, he said, as this would make implementing monetary policy ‘pretty difficult.’

He continued: ‘Until we’re sure that the effects of the crisis have been reabsorbed we will need to go on providing a strong monetary stimulus to consolidate the recovery, thus bringing the inflation level back up.’

It is also important to get the economy going again quickly for the sake of the banking system’s health, he said. Otherwise, banks would face ‘a sharp deterioration in credit risk and a resurgence of impaired and bad loans’, he said.

Asked whether the ECB might not exhaust all resources allocated to the PEPP, Panetta echoed ECB President Christine Lagarde, who following the July 16 press conference had also stated that the full envelope would be deployed absent ‘significant upside surprises’.

The total volume of the PEPP is €1.35 trillion, its original €750bn volume when announced on March 18 having been stocked up by €600bn at the Governing Council’s June monetary policy meeting.

Panetta emphasized the potential flexibility of purchases made under the PEPP with respect to time, asset classes and countries, but downplayed the ECB’s use of this latitude. ‘So far, we’ve only done this to a limited degree, as our interventions have been effective’, he said. ‘The programme is working well, and I don’t see any economic reasons to change our decisions or actions.’

Regarding the €750 billion recovery fund agreed on by EU leaders earlier this month, ‘Italy bears a great responsibility’ to make the decision a ‘turning point’ by using the money to rectify its economy’s structural issues, he said.

The mutualisation of debt to finance the recovery fund amounts to a ‘fundamental change’, he said. ‘It marks progress towards a genuine capital markets union and will make the euro area more attractive to international investors.’

Whereas past capital inflows to the region benefitted select countries and thus aggravated divergences, now capital can ‘flow towards securities issued jointly, the proceeds of which will be used to finance the economy of the entire euro area’, he said. ‘The euro area is becoming more normal.’