ECB’s Schnabel: Could Take Years to Fully Get Over Crisis’ Impact

18 September 2020

By David Barwick – FRANKFURT (EconoStream) – It could be years before economies fully get over the fallout from the pandemic, European Central Bank Executive Board member Isabel Schnabel said Friday.

In a speech at Deutscher Juristentag 2020, Schnabel, according to a text provided by the ECB, focussed on the heterogeneity of the crisis’ impact across countries and societies, and warned of greater cross-country divergence in Europe.

‘While a strong recovery is expected in the third quarter’, she noted, with GDP by the end of 2022 still likely to be about 3% lower than had been projected just before the crisis erupted, ‘[i]t may therefore take years to completely overcome the economic damage caused by the crisis.’

Moreover, she said, the harshest blow has been felt by those countries that were already struggling under weak growth and a diminished capacity to respond fiscally, she said. ‘As a consequence, the pandemic threatens to exacerbate existing cross-country differences.’

In the Eurozone, she observed, the European Commission projects a 6.3% decline in German GDP this year, in contrast to a drop of more than 10% each in French, Italian and Spanish output.

‘It is unlikely that the resumption of economic growth in 2021 will significantly reduce these differences’, she said. ‘Risks of an increasing cross-country divergence in economic performance therefore continue to persist.’

Schnabel noted concerns about fragmentation during the early stage of the crisis, when the ECB’s systemic stress indicator showed Europe’s financial sector ‘most likely facing an imminent and severe financial crisis, which was only averted by a decisive and swift policy response on the part of the ECB.’

In particular, she praised the ECB’s pandemic emergency purchase programme, which ‘effectively countered risks of fragmentation in European financial markets’.

The EU Next Generation recovery fund should be deployed in a manner that sustainably supports potential growth of member countries, she urged. The proper measures can mitigate unhealthy differences, she said.

‘This is also beneficial for monetary policy’, she said. ‘A lower degree of divergence in economic developments within the euro area increases the effectiveness of monetary policy measures.’