Education has taken a back seat for many children whose schools closed during the coronavirus lockdown. Yet for Christine Lagarde, the past six weeks have provided a steep learning curve, as the European Central Bank president tried to recover from one of the worst communication gaffes in modern monetary policy history.
At her last press conference in March, Ms Lagarde said it was not the ECB’s role to “close the spread” in sovereign debt markets — referring to the gap between Italian and German bond yields that is a key risk indicator for Italy. The comment triggered the biggest single day fall in Italian sovereign bonds in a decade amid a wider eurozone debt market sell-off.
The ECB president, who replaced Mario Draghi in November, has been working hard to bounce back since then. She has been widely praised for launching the €750bn pandemic emergency purchase programme (PEPP) to buy bonds and other assets as well as agreeing to give banks up to €3tn of ultra-cheap liquidity and more than €120bn of capital relief.
These measures helped to stabilise eurozone bond markets. But Europe is heading for its deepest postwar recession and government debt levels are expected to balloon. Ms Lagarde warned EU leaders last week that eurozone GDP could fall 15 per cent this year. On Tuesday, Fitch downgraded Italy’s credit rating to one notch above “junk” status.
Most economists believe the ECB needs to beef up its asset-purchase programme and its support for banks, even if some believe it will hold fire when its governing council holds its first ever monetary policy meeting by teleconference on Thursday. If it does decide to act, here are five options it is likely to consider:
The ECB has already spent about €100bn of the €750bn PEPP programme it announced last month. At that pace, it will only last until October, meaning it is likely to be expanded. Ms Lagarde may, however, decide to only say on Thursday that it is ready to expand its asset purchase plans when required.
The coronavirus crisis is expected to cause some government and company bonds to be downgraded below investment grade to “junk” status. The ECB last week changed its rules to allow it to accept these “fallen angel” bonds as collateral. Economists think it could go further and start to buy such bonds — as the US Federal Reserve did recently.
In June, for the first time, the ECB will start lending money to banks at a rate that is even more negative than its deposit rate, via its Targeted Longer Term Refinancing Operation, to encourage them to keep lending to clients. Given the pressure on banks it could boost this subsidy by lowering its TLTRO rate from minus 0.75 per cent to minus 1 per cent.
Another way for the ECB to support banks — which provide the lion’s share of financing for Europe’s households and businesses — is to expand its rule that gives lenders an exemption on paying negative interest for some excess deposits. This tiered deposit scheme could be increased from six times their minimum reserve requirements to 10 times.
Among the €2.8tn of assets that the ECB has bought, it has steered clear of purchasing the debt of banks themselves. Some economists believe this could change, such as by buying short-term bank debt to keep financing costs low for lenders.
martin.@[email protected]; @MAmdorsky
Coronavirus reads
Economist Jim O’Neill thinks the death of globalisation is much exaggerated: “We are witnessing one of the most remarkable episodes of international collaboration that the pharmaceutical sector has ever sustained.” (Project Syndicate)
As some frugal eurozone finance ministers hint at the need for belt tightening after the pandemic, historian Adam Tooze warns against making the fatal austerity mistakes of the last crisis (The Guardian)
Jonathan Portes hopes the Covid-19 crisis may lead to a better appreciation of the benefits of immigration in the UK (Politics.co.uk)
Chart du jour: Europe eases up
The EU’s biggest economies are beginning to ease quarantine measures and gradually restart their economies. Here’s the Financial Times’ guide to how France, Italy, Germany and Spain are charting their way out of lockdown. (FT)
Pandemic news round-up
Sweden has avoided imposing a formal lockdown to fight coronavirus © TT News Agency/AFP via Getty Ima
Trust us, we’re Swedish
The WHO has waded into the debate over Sweden’s decision not to impose a lockdown, saying the country has taken “strong measures” against the virus. Countering criticism of the government, Dr Mike Ryan of the WHO said that Sweden had opted to rely on its “relationship with its citizenry” to take appropriate distancing measures. The New York Times notes the country’s comparatively low death rate (22 per 100,000 people) despite the fact not everyone seems to be taking precautions.
Budget balancing act
European Commission officials are working on ways to release substantial cash grants to hard-hit EU member states as they forge plans for a new seven-year budget, writes Sam Fleming.
The institution’s political leadership held an internal debate on Wednesday on what to do. Vera Jourova, one of the commission’s vice-presidents, said afterwards that Brussels wants to find an “appropriate balance” between the provision of grants, loans and investment guarantees.
Achieving that juste milieu will be fiendishly difficult. Southern member states want to receive large transfers of money to help them fight their way out of the crisis, instead of chunky loans that will end up saddling them with more debts.
But northern capitals are opposed to grants, and are prepared to stand their ground in discussions on the EU’s next seven-year budget and the recovery “instrument” that will accompany it.
One important way of delivering grants will probably be ramping up cohesion spending in the early years of the next budgetary cycle, which begins in 2021. However, there has also been discussion of top-up funding being obtained from member states alongside the main budget.
Complicating matters is the need to find a bridging solution that brings badly-needed funding into play as soon as possible, given the complexity of getting spending plans approved in Brussels and national parliaments.
A diplomat from one northern European state said it will be necessary to explore the idea of “substantial transfers” to badly affected member states through a front-loaded budget. These sums would not need to be repaid.
The money would be on top of commission borrowing that would allow those states to profit from “favourable loans”, the diplomat added. “The idea is to combine both instruments to help most affected member states to weather the corona storm and kick-start their economies without increasing their debt refinancing burden to an unsustainable level.”
The proposals are all still under discussion; the commission is expected to unveil its plans in the first half of next month.
Minority report
Ethnic minorities in Europe and the US have been disproportionately affected by Covid-19. The FT reports on tentative studies from researchers looking for clues about the association with ethnicity:
“When we started to raise the alarm about four weeks ago some people thought it was scaremongering,” said Kamlesh Khunti, professor of primary care diabetes and vascular medicine at Leicester University in the UK. “Now we see that more than 70 per cent of healthcare professionals who have died in the UK have been from Bame backgrounds.”
Air France has been set a series of climate targets as part of its government aid programme © AFP via Getty Images
Green airlines take off
The French government has announced a series of climate targets for Air France as a condition of its €7bn government bailout. Economy minister Bruno Le Maire on Wednesday announced that the airline would have to cut carbon emissions on short haul domestic flights by 50 per cent by 2024 and aim to use low emission fuel for 2 per cent of flights by 2025. Portugal on Wednesday became the latest government to announce a “large scale” intervention in the sector, stepping in to help TAP. At an e-meeting of EU transport ministers on Wednesday, 16 member states called on the commission to change its airline compensation rules to allow for the temporary use of vouchers for customers whose flights have been cancelled.
Paris in bloom
The FT’s Victor Mallet rejoices in the fresh sights and sounds of Paris under lockdown:
“The pandemic, in the words of the French President Emmanuel Macron, is a profound ‘anthropological shock’. So when Paris finally emerges blinking into the streets, one question will be whether our new receptiveness to the sights and sounds of the city around us will evaporate, or outlast the grave economic and social damage that has already been inflicted by the disease.”
News in brief
The US economy recorded its worst quarter since the financial crisis, shrinking 4.8 per cent at the start of the year. In the eurozone, economic sentiment suffered a record plunge in April, while Belgium’s flash GDP reading for the first quarter recorded a 3.9 per cent fall. The UK government has announced plans to ramp up testing in care homes after a sharp rise in deaths among the elderly.
Elsewhere in Europe
EU commissioner for values Vera Jourova © AP
Another judicial spat
Brussels has launched a fresh legal challenge against the alleged undermining of Poland’s independent judiciary — making it the EU’s fourth infringement procedure against the Law and Justice party government. EU commissioner for values Vera Jourova warned on Wednesday that Warsaw’s new disciplinary rules for judges posed “clear risks” of political control of court decisions. (FT)
Remember Northern Ireland?
EU and UK officials hold detailed talks about the state of customs controls in Northern Ireland on Thursday. Brussels pushing the government to provide details on how it intends to carry out checks in the region. Jim Brunsden has more.
Choosing the Huawei
A day after the German government chose Deutsche Telekom to develop the country’s Covid-19 tracing app, Handelsblatt reports the German giant risks a spat with Berlin after it informed the government it wants to “co-operate closely” with China’s Huawei in the rollout of 5G.
Coming up on Thursday
EU top diplomat Josep Borrell faces questions from MEPs about a controversial disinformation report that has strained ties with China. The EU/UK special committee meets virtually to discuss Northern Ireland.
Holiday notice: The Brussels Briefing is taking a break for May Day. We’ll be back with you on Monday.
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