ECB’ Lagarde called for more grants rather than loans

calendar 22/10/2020 - 16:45 UTC

In an interview Monday (19th Oct), Lagarde called for more grants (fiscal stimulus) rather than loans (monetary stimulus) as the economy may suffer more on long term scarring effect due to corona recession, job and income uncertainty.

Lagarde said on COVID-19 resurgence and targeted (localized) lockdown 2.0 in the EU that it will inevitably hamper the economic recovery going forward:

“The second wave of the pandemic in Europe, notably in France, and the resulting new restrictions are adding to the uncertainty and weighing on the recovery. Since the rebound we saw over the summer, the recovery has been uneven, uncertain, and incomplete and now risks losing momentum. We will keep a close watch on indicators throughout the autumn. Our central scenario foresees the euro area GDP declining by an average of 8% in 2020 and assumes partial and localized containment measures. If the situation deteriorates, our projections, which we will revise in December, will obviously be gloomier”.

On the long-term scarring effect of COVID-19, Lagarde said job/income losses are critical for the future social fabric, consumer confidence, demand, and growth. Thus the EU/governments must not withdraw fiscal safety nets too soon:

“Job losses are the most serious. They pose a risk for the social fabric, household income, demand, and growth. Governments in the euro area need to be extremely mindful of this. We think it’s essential that the fiscal safety nets that governments put in place during this crisis are not withdrawn too soon”.

On the need for any further monetary stimulus in case of further deterioration, Lagarde stressed that the ECB is still not out of bazookas. Lagarde also claimed that due to ECB’s unprecedented pandemic QQE, the EU GDP growth will be 1.3% higher along with +0.8% inflation, while almost 1M jobs are saved:

“The options in our toolbox have not been exhausted. If more has to be done, we will do more. On taking up my position, I was told that there was nothing left for me to do, that everything had been done. But that was clearly not the case! We have found ways to stabilize the markets and support the euro area economy. Thanks to the action we took between March and June, we estimate that growth will be 1.3 percentage points higher overall, and inflation 0.8 percentage points higher. According to the ECB’s assessment, we have saved one million jobs in the euro area. So we have acted, and our action has been effective.”

On the supporting role of PEPP (Pandemic QE) for the real economy, Lagarde said it was first designed to calm the financial market and for the effective transmission of lower rates to the Main Street:

“The PEPP has a dual objective: first, to stabilize the markets, and this objective has been fulfilled; next, to help bring inflation back to its pre-pandemic path, while keeping interest rates low and ensuring that these low rates are passed on to the real economy, which has worked.”

“Our market actions, in tandem with our program of long-term loans to the real economy – the well-known targeted longer-term refinancing operations (TLTROs) – have enabled lending to continue at very low rates. Lending rates for households and firms are around 1.4% to 1.5%. In the euro area, the volume of lending has increased by 7% for firms and 3% for households.”

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On increasingly less effective monetary stimulus being provided by global central banks and also ECB since 2008 GFC, Lagarde said previously there was not much fiscal support (stimulus), especially for the Euro area. But now the situation is different and there is a huge fiscal stimulus. Thus the dual combination of monetary and fiscal stimulus (loans and grants) will be effective. Lagarde also urged for effective implementation of the €750B Euro recovery fund from Jan’21 and pointed out the total common fiscal stimulus is around €1.30T, in line with ECB’s plan:

“After the crisis of 2008, fiscal policy was not forthcoming. Central banks were working very much in isolation. This was particularly true in the euro area. But we are now in a different paradigm. Fiscal support is playing its part and is working hand in hand with monetary support. This is unprecedented and will be effective.”

“As of a meeting of the Eurogroup in April, I had been stressing the need for a plan that is substantial, quick, and flexible, but at the same time targeted at the countries and sectors that need it the most. According to our assessment, that corresponded to an envelope of between €1 trillion and €1.5 trillion. If you take into account the €540 billion of the first emergency package agreed by the Eurogroup – which included support for the provision of loans to firms, the short-time work schemes (the SURE plan), and the additional financing via the European Stability Mechanism (ESM) – and the €750 billion of the recovery plan approved by the European Council on 21 July, you could say we’ve reached that amount.”

“The Commission’s aim is to be able to distribute these funds at the beginning of 2021, and this timeline must be kept. The ball is in the court of the national governments, who have to present their recovery plans – some of which are already ready – and of the Commission, which will have to examine them carefully but quickly. We also need rapid progress on the political side, in particular the adoption of the measures by national parliaments.”

“It is vital that this extraordinary plan, which has broken significant taboos in certain countries, is a success. If it is not targeted, if it gets lost in an administrative labyrinth and does not support the real economy in reorienting our countries to be more digital and green, we will have missed a historic opportunity to make a real difference”.

“I will repeat the words of my predecessor: the euro is irreversible. Additionally, the €750 billion recovery plan – collective borrowing that represents 5% of EU GDP – is a major turning point for Europe. It has changed things completely. We now have an additional tool at our disposal, even if it is something of an exception. National governments have shown that, if the situation demands it, there is clearly a will to work together in solidarity. Having more than 50% of the €750 billion in the form of grants for the countries and sectors that have been hit hardest is truly innovative.”

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