There are many ways the European Central Bank could beef up its stimulus for the eurozone’s pandemic-stricken economy when it announces its latest monetary policy decision on Thursday.
The most obvious and widely anticipated would be to increase the size of its scheme to buy an extra €750bn of bonds this year — known as the Pandemic Emergency Purchase Programme (PEPP) — which it launched in response to the coronavirus crisis in March.
Yet by late May, that scheme was still less than a third invested, and at its current pace is not due to run out of firepower until October, meaning the ECB could wait until its meeting in July or even September to ratchet it up.
So economists have been thinking of other ways ECB president Christine Lagarde could give a helping hand to the region’s crisis-hit economy. One option is to provide more clarity on the timing and — most crucially — the flexibility of the PEPP scheme.
The reason this matters is that the more flexible and long-lasting PEPP is, the bigger the backstop it provides for crisis-hit countries such as Italy to soak up their extra debt issuance and keep a lid on financing costs by preventing bond yields from surging.
Richard Barwell, head of macro research at BNP Paribas, said that until recently “the ECB did not have yields and spreads under sufficient control and I think that fundamentally reflects a lack of investor confidence in the conviction and the duration of the PEPP put”.
The ECB’s sovereign bond purchases have historically been bound by self-imposed rules. One is to not buy more than a third of any country’s eligible debt. Another is to buy sovereign bonds in proportion to the size of each country’s economy, using a yardstick known as the capital key that reflects national shareholdings in the ECB.
The first rule has already been ditched for PEPP and the ECB says that it has flexibility on the second. It is this flexibility that investors would like Ms Lagarde to spell out more clearly.
When will the ECB aim to bring the sovereign bond holdings of PEPP in line with the capital key? Is it when the scheme stops new investments, or could it happen while it reinvests the proceeds from bond repayments, which could last much longer?
François Villeroy de Galhau, the Banque de France governor, stirred things up last week by suggesting that the ECB should ditch the capital key. But Philip Lane, ECB chief economist, rebuffed this idea a few days later, calling the capital key “the benchmark” of the PEPP.
Last week, the ECB published the first breakdown of PEPP purchases. It had largely bought sovereign bonds in proportion to its capital key, with two moderate exceptions. It bought €37.4bn of Italian government debt — €8.1bn more than its capital key would imply — and €23.6bn of French debt — undershooting its share by €11.7bn.
“There was clearly some skew towards Italy here — but not as much of a skew as we might have anticipated,” said Krishna Guha, vice-chairman of broker-dealer Evercore ISI. “It is not clear whether we should read this as them being reluctant to deviate more from the capital key or that they didn’t need to.”
Some of the pressure on the ECB has been lifted since the EU proposed to create a €750bn recovery fund to support the eurozone countries hit hardest by the pandemic, easing strains in government debt markets.
But the EU recovery fund is still being debated and unlikely to make much impact until next year. Meanwhile, the eurozone economy is heading for a record postwar recession while teetering on the brink of deflation. So for now, the ECB is still very much in the hot seat.
martin.arnold@ft.com; @MAmdorsky
Chart du jour: carbon conflicts
The EU is ready to “create some trouble” with a carbon tax on polluting imports, according to top Brussels official Diederik Samsom. Speaking on Wednesday, Mr Samsom said the European Commission would redouble its efforts to impose a carbon border levy whose proceeds will help fund a Covid-19 borrowing spree. Before the crisis, Ursula von der Leyen suggested countries such as the US and China could avoid getting hit with the tax if they put a price on carbon. The chart above shows how China is trying to get in on the act with a domestic carbon pricing system.
Planet Europe
Berlin reloads bazooka
Angela Merkel is continuing to delight fiscal doves. Germany’s coalition government on Wednesday agreed the terms of a major €130bn coronavirus stimulus programme after two days of heated negotiations. The agreement includes a surprise VAT cut worth €20bn for 2020, welfare for households, and €2.2bn in car-scrapping measures. (FT, Bloomberg)
Europe’s moral high ground
European governments would never use military force against domestic protests like those seen in the US, Margaritis Schinas, commissioner for Europe’s way of life tells the Financial Times: “What I can say is that in Europe we keep our armies only for our foreign enemies,” said the Greek commissioner. When asked about the US protests, Dutch prime minister Mark Rutte said the Netherlands also has a “systemic problem” with racism. Le Soir reports on a 20,000 strong petition in Belgium calling for the removal of all statues of Leopold II in Brussels as part of the Black Lives Matter campaign. (NOS)
Belgian lift-off
Pubs, gyms and café’s in Belgium will reopen from next Monday as part of the country’s next phase of deconfinement. Belgians will also be able to see 10 people without the need for social distancing but have been told to stay away from “social kissing”. Belgium’s borders will reopen from June 18. The Netherlands has said it will also permit travel to 12 European countries later this month but Brits and Swedes aren’t allowed in without extra quarantine measures. (Le Soir, Volkskrant)
Summit on, summit off
EU27 leaders are likely to hold their last teleconference summit of the crisis on June 19. The next EU budget and the recovery plan will be on the agenda but diplomats expect another two extraordinary summits might be needed in July to finally conclude a deal on the spending plans. Meanwhile, a German led EU-China summit due in Leipzig in September has been called off. No new date has been announced.
Cash cows
The always quotable boss of Ryanair Michael O’Leary thinks Europe’s governments are destroying the principles of the single market by pumping billions of taxpayer money into airlines without any strings attached:
“Today’s bailouts are regressive, unfair and unlawful. They will set the clock back, threatening the future of European aviation at least as much as the pandemic itself. The commission must defend its independence, stand firm against powerful member states, uphold the law, and build a single, coherent framework that promotes competitiveness, connectivity and a cleaner environment.”
News in brief
The EU’s unemployment rate has risen from a 12-year low but the increase isn’t as bad as some economists expected. The UK’s Brexit medicine stockpile is being eroded by the coronavirus. And Sweden’s leading epidemiologist has acknowledged the country should have imposed harsher lockdown measures to reduce its pandemic death toll.
Coming up on Thursday
Christine Lagarde holds her latest press conference after the meeting of the ECB governing council at 13.30. EU27 transport ministers dial in for their latest videoconference from 15.00.
mehreen.khan@ft.com; @mehreenkhn
Source: Economy - ft.com
