The president of the European Central Bank said the region’s economy should be ‘gradually’ weaned from its fiscal and monetary stimulus to repeat the mistakes made in previous crises when aid was withdrawn too quickly.
Christine Lagarde said there would be a “difficult situation” for policymakers to manage once the coronavirus pandemic ended and the economy began to recover, recommending switching to “flexible support” instead of “all the taps” to close at the same time “.
“Our commitment to the euro has no limits,” Lagarde said. “We will act as long as the pandemic causes a crisis in the eurozone.”
Her comments in an interview with the newspaper Le Journal du Dimanche came when economists expressed concern about the slow vaccination of Europe and the delayed fiscal stimulus could lower the economy further under the US and China.
After the eurozone economy shrank by 6.8 per cent last year, it is not expected to return to pre-pandemic levels until the middle of next year. In contrast, China has already shaken off the economic impact of Covid-19, which grew by 2.3 percent last year, while the U.S. economy is expected to reach its pre-pandemic scale by the middle of this year.
Lagarde said Europe’s “economic recovery had been delayed but not derailed”. The ECB was still “convinced that 2021 will be a recovery year”, she said, adding: “We expect the upswing to increase in the middle of the year, even if the uncertainty is still there.”
Erik Nielsen, chief economist at UniCredit, said in a statement to clients on Sunday that he was “increasingly convinced that we are going into another 3-5 years of European underperformance in growth compared to the US”.
Analysts at Allianz warned in a recent report that Europe has a five-week delay on the vaccination front which, if not rectified, could cost nearly € 90 billion ‘. This is based on a calculation that every week coronavirus restrictions reduce the quarterly nominal growth of the gross domestic product by 0.4 percentage points.
Investors will see if the European Commission lowers its forecast for the eurozone economy this week, after predicting in November that it will grow by 4.2 per cent this year and 3 per cent next year.
The ECB is due to publish new quarterly forecasts next month and several members of the governing body have told the Financial Times that they believe the outlook for growth of 3.9 per cent looks realistic this year, even if the recovery is delayed in the short term.
However, one councilor said the big downside risk is that delays through vaccination and new, more contagious strains of the virus could force governments to keep longer strict curbs in place – “this is really important for recovery”. Lagarde expressed this concern when she said: “We are not immune to unknown risks.”
She urged the EU to expedite the process of ratifying the € 750 billion national spending plans for the recovery fund in support of 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 come back to correct things that went wrong.”
Investors were encouraged by last week’s news that Mario Draghi, the former president of the ECB, had accepted an invitation to become Italy’s prime minister. Lagarde said she had “full confidence” in Draghi’s ability to “restart the Italian economy”.
Last week, a group of more than 100 economists, including Thomas Piketty, signed a letter published by several newspapers calling on the ECB to pay off the nearly € 2.5 tonne of government debt it owns. to cancel or to convert it into perpetual bonds in exchange for higher government investment.
But Lagarde dismissed the idea as’ unthinkable ‘and acknowledged her previous position:’ It is in breach of the EU Treaty which strictly prohibits monetary financing. This rule is a fundamental pillar of the common framework that supports the euro. ”