ECB’s Stournaras: Expect Solid Recovery from 2H, But Pandemic Still a Threat

6 April 2021

By David Barwick – FRANKFURT (Econostream) – The pandemic remains a threat to economic recovery, but various factors support the anticipation of substantial improvement starting in the second half of this year, European Central Bank Governing Council member Yannis Stournaras said Tuesday.

In the Governor’s Annual Report 2020 of the Bank of Greece, which he heads, Stournaras said the rollout of vaccines was ‘crucial to curbing the pandemic and to reopening the economies’, but that in the meanwhile, the pandemic still posed ‘serious risks to public health and to the rebound of economic activity.’

Despite delays in immunisation and still high Covid-19 case numbers, he said, resurgent global demand, fiscal support and favourable financing conditions ‘support expectations for a solid recovery in the EU from the second half of 2021 onwards.’

Citing the ECB’s staff projections calling for euro area growth of 4.0% this year and 4.1% next, Stournaras said these forecasts hinged on faster vaccination, the lifting of lockdown measures, continued fiscal support, the preservation of favourable financing conditions and ‘timely utilisation’ of Next Generation EU recovery fund money.

ECB policy measures and the acceptance of Greek sovereign debt have ‘substantially improved the liquidity situation of the Greek banking system’, he said. However, banking system fallout from the pandemic would be aggravated this year by ‘a new wave of NPLs, as well as an anticipated worsening of the Deferred Tax Credits (DTCs)’, he said.

The Greek central bank sees new NPLs this year of €8 to €10 billion, he said. Besides this and DTCs, Greek banks suffer from low profitability and other challenges that plague banks throughout the euro area, he said.

The EU Stability and Growth Pact needs simpler rules that are ‘more flexible, realistic and operational’, but also needs ‘an enhanced implementation of credible countercyclical fiscal policies and parallel strengthening of automatic stabilisers, with a greater focus on debt sustainability’, he said.

Revising the fiscal rules poses a challenge, he said, but if credible, new rules would give markets confidence. In this context, he proposed dispensing with ‘complex and time-consuming treaty amendment processes’ in favour of ‘only political support at the level of EU leaders.’