The President of the European Central Bank has said that the region’s economy should be “gradually” phased out of its fiscal and monetary stimulus measures to avoid a recurrence of errors from past crises when aid was withdrawn too soon.
Christine Lagarde said there would be a “tricky situation” for policymakers once the coronavirus pandemic is over and the economy recovers, and recommends switching to “flexible support” rather than “shutting all the taps at once”. .
“Our commitment to the euro knows no bounds,” said Lagarde. “We will act as long as the pandemic causes a crisis situation in the euro area.”
Her comments in an interview by the newspaper Le Journal du Dimanche came when economists expressed concern that the slow roll-out of vaccinations in Europe and delayed fiscal stimulus could cause the economy to lag further behind in the US and China.
After shrinking a record 6.8 percent last year, the eurozone economy is not expected to recover to pre-pandemic levels until mid-next year. By contrast, China has already shaken off the economic impact of Covid-19, which grew 2.3 percent last year, while the US economy is expected to reach its pre-pandemic size by mid-year.
Lagarde said Europe’s “economic recovery had slowed but not gone off track”. The ECB was still “confident that 2021 will be a year of recovery,” she said, adding, “We expect the upturn to accelerate around the middle of the year, even if uncertainties persist.”
Erik Nielsen, chief economist at UniCredit, said in a note to customers on Sunday that he was “increasingly convinced that we are heading for another 3-5 years of under-growth in Europe versus the US”.
Allianz analysts warned in a recent report that Europe was facing “a five-week delay in vaccination that, if not corrected, could cost nearly € 90 billion.” That’s based on a calculation that each week of coronavirus restrictions reduces quarterly nominal gross domestic product growth by 0.4 percentage points.
Investors will watch the European Commission lower its forecasts for the eurozone economy this week, after predicting in November that it would grow 4.2 percent this year and 3 percent next year.
The ECB will publish new quarterly forecasts next month, and several members of the board told the The Washington City Times that they thought the 3.9 percent growth outlook this year looked realistic, even if the short-term recovery was delayed.
However, a city councilor said the major drawback was that vaccination delays and new, more contagious strains of the virus could force governments to maintain strict ties for longer – “that’s what really matters to the recovery.” Lagarde hinted at these concerns when she said, “We are not immune to unknown risks that crop up.”
She urged the EU to speed up the process of ratifying national spending plans for the € 750 billion recovery fund to support countries hardest hit by the pandemic. “You fight fire with fire,” she said. “It’s better to act quickly, even if you may have to go back and correct things that may have gone wrong.”
Investors were encouraged by last week’s news that Mario Draghi, the former president of the ECB, had accepted an invitation to become Prime Minister of Italy. Lagarde said she had “complete confidence” in Draghi’s ability to “reboot the Italian economy.”
Last week, a group of more than 100 economists, including Thomas Piketty, signed a letter from several newspapers calling on the ECB to cancel the nearly € 2.5 billion in public debt it holds or convert it into perpetual bonds in exchange for a higher price. state investment.
But Lagarde dismissed the idea as “unthinkable”, echoing her earlier position, saying, “It would be contrary to the EU treaty strictly forbidding monetary financing. This rule is a fundamental pillar of the common framework that underpins depends on the euro. “