The European Central Bank has taken a step towards restoring its credibility. The package announced by president Christine Lagarde on Wednesday was bold and impressive. Combined with quantitative easing already under way, the central bank will buy over a trillion euros of assets over the rest of this year. Whatever else happens, its move sharply reduces fears of a repeat eurozone crisis. Government bond spreads should remain under control and redenomination risk should be absent. There is no reason to expect a disorderly break-up of the eurozone.
The ECB was not alone in deploying a “big bazooka”. The Bank of England followed on Thursday with a £200bn asset-purchase programme and a cut in interest rates to 0.1 per cent, the lowest in the Bank’s 325-year history.
While their measures ought to stabilise liquidity concerns in the eurozone and in the UK, that will not be enough. Ms Lagarde and Andrew Bailey, the new Bank of England governor, have put the onus on Europe’s politicians to follow up with spending programmes that provide support to workers and businesses worried about the future. Hosing the financial sector with liquidity cannot help families pay bills without money coming in.
The ECB launched a €750bn programme of asset purchases that will come to an end only once the coronavirus crisis is over, including both commercial paper and Greek government bonds. The bank has also broadened the collateral it will accept to include corporate financial claims.
This programme rectifies mistakes by the central bank. The ECB was forced to clarify Ms Lagarde’s comments last week that it was not the bank’s job to close the spread between yields on member states’ costs of borrowing. This prompted anger, not least, in Italy where lo spread is closely watched and many have been wondering at a seeming lack of European solidarity. Ms Lagarde’s remarks sparked a wholly unnecessary sell-off in Italian bonds.
Actions, however, speak louder than words. The phrase “whatever it takes” has become ubiquitous among European politicians but now Ms Lagarde and Mr Bailey have provided the monetary firepower to back up finance ministers’ rhetoric.
Yet both are also at the mercy of global flows. The dollar funding squeeze now being witnessed shows the failure to establish the euro as an alternative global reserve currency. Neither has the project to deepen Europe’s capital markets as an alternative to the US succeeded: companies are desperate for dollars, not euros or pounds. Sterling fell to its lowest level against the dollar since 1985 on Wednesday and actually rose after the BoE cut interest rates.
There have, moreover, been public displays of disunity over the ECB’s approach. On Wednesday the bank went as far as publicly contradicting Austria’s central bank head, who said monetary policy had reached its limits. But ECB officials disagreed over how far to take its new “no limits” policy.
Similar signs of discord or failures of co-operation among EU leaders will fuel nationalist populism. It was telling that German chancellor Angela Merkel did not mention Europe in a rare televised speech on Wednesday. The ECB, for its part, was probably damned either way. Eurosceptic populists in the north will seize on the stimulus as a sign of the euro’s dysfunction. Populists in the south would have portrayed a failure to act as a betrayal of solidarity.
The EU and UK central banks are, nonetheless, on the right track. Monetary policy cannot solve all the problems facing the economy, but the politicians have no excuse or distractions. They must follow and act decisively.
