ECB’s Lane: On a Long Journey Needing Sustained Fiscal and Monetary Support

10 May 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Monday compared the recovery to a long journey requiring sustained policy support.

Asked by French daily Le Monde about the state of the European economy, Lane, who is also chief economist, stressed the large negative difference in output between now and 2019, calling this a ‘huge downturn’.

May and June may represent what he again termed ‘an inflection point’ from which ‘the economy will be growing quickly, but from a subdued level’, so that ‘even with pretty rapid growth for the rest of this year’, it would take a year to return to 2019 GDP levels.

Joblessness would persist above 2019 levels until 2023, he said. ‘It is a long journey, which requires a sustained effort by fiscal and monetary policymakers to support the recovery’, he added.

Still, with regard to the pandemic’s structural economic impact, ‘[t]here are reasons to be optimistic’, he said, noting that the pandemic ‘will only be a two or three-year event’. However, some sectors will not escape scarring, he said.

Despite 10-year European sovereign bond yields having increased in recent months, they still ‘remain relatively low and anchored, and we have a lot of stability in interest rates thanks to that’, he said. The rest of the yield curve is also important, and the ECB’s ‘overall commitment is to maintain favourable financing conditions’, he said.

The higher pace of asset purchases agreed in March ‘will continue over the coming weeks’, he said. ‘We will review it again at our June meeting, when we assess the favourability of financing conditions together with the inflation outlook. And we can increase or decrease our purchases depending on what is necessary to keep financing conditions favourable.’

Lane indicated a relaxed view toward higher sovereign debts, observing that very low interest rates implied that ‘the financial burden of high sovereign debt is going to be very low.’ As for the possibility of higher interest rates, ‘We don't see this risk on the horizon’, he said.

‘And even if it did emerge, much of the debt issued now is long term. International investors understand this: they are not requiring high risk premia to hold sovereign debt’, he said. ‘So current levels of debt in today’s environment are not a source of concern to global investors – but, of course, governments will have to rebuild fiscal capacity once the recovery firmly takes hold.’

The main financial risk was more likely that concerning potential corporate insolvencies, he said. Fiscal support must not be withdrawn in such a way as to ‘unnecessarily’ cause these, he said.

The Next Generation EU recovery fund ‘shows the potential that could be unlocked if we had a more common approach to fiscal policy’, Lane asserted. Thanks to Europe’s manifest readiness to countenance some joint financing, global investors ‘have understood that Europe will stand together’, he said. ‘The signal NextGen has sent had an immediate effect of lowering risk premia across Europe. The value of that is many times the value of the fund itself.’