ECB: economy severely damaged, expansive fiscal policies are needed, no debt cancellation

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The Covid crisis is increasingly serious and Christine Lagarde, who urges countries to approve the loan package “without delay”, reiterates that it is not possible to cancel debts because the European Treaties prohibit it, then she quotes Goethe: “We need perseverance”. Investments for digitalisation, environmental and social sustainability will be fundamental, as will the coordination between monetary and fiscal expansionary policies.

ecb covid crisis

The second wave of coronavirus will “severely” affect the economy, with “clearly downside risks to the short-term economic outlook“. Christine Lagarde, who spoke to the Economic and Monetary Affairs Commission of the European Parliament, does not hide her concerns about the consequences of the Covid crisis: the president of the ECB believes that the answers given so far by European governments have been effective, but since the pandemic is far from being put under control, she asks that it be done more, because the damage to the European economy will be significant.

The ECB believes that “the Next Generation EU package must become operational without delay”. Investments and reforms, “if oriented towards medium and long-term challenges”, can in fact “build a bridge towards a successful and inclusive recovery”.

Expansive fiscal policies, sustainability and digitalization to get out of the Covid crisis

Furthermore, the president of the ECB states that “the additional resources of the package can facilitate expansionary fiscal policies, particularly in euro area countries with limited fiscal space”. For Lagarde, “public investments and reforms, especially if oriented towards medium and long-term challenges such as environmental sustainability and digitalisation, can be a bridge to a successful and inclusive recovery … combine reforms with a guided stimulus investment has the potential to further increase growth. Together they should shape the future of our economies and ensure they adapt to the new normal that will materialize when the peak of the pandemic passes”.

In this regard, for Christine Lagarde the role of governments is really important: “Fiscal policy has this role for three reasons: the stimulus must come quickly; it has an important sectoral dimension for which monetary policy is not the right tool; and some of the policy instruments, such as credit guarantees, are inherently fiscal”.

The ECB president points out that so far the actions to combat the crisis show that “monetary policy and fiscal policy can mutually reinforce each other in the current circumstances. Monetary policy must guarantee favorable financing conditions for the entire economy. At the same time, fiscal policy must support demand in the short and medium term, strengthening confidence and increasing the growth potential of our economies”.

It should be noted that also in the US the situation is the same: the Federal Reserve is asking for greater fiscal support from the government for expansionary monetary policies.

ECB cannot cancel debts, it would go against the EU Treaties

Responding to a question from Italian MEP Marco Zanni (Lega, populist party) on the possibility of the ECB to cancel the debts of European nations contracted in this difficult period of crisis, Lagarde states: “I always read with interest everything the representatives say of the EU Parliament and especially the presidents, my response to Sassoli’s idea (president of the Parliament) is very short: everything that goes in that direction is against the Treaties, there is article 103 which prohibits that type of approach and I respect the Treaties”.

The ECB also fears the social implications of the Covid crisis, not just the economic ones, and is aware that European citizens are asking for concrete solutions: “So far, the European response to the crisis has not only been impressive, but it has also been very effective. As we enter the second phase of the crisis, we must persevere and continue with the same commitment to continue delivering results for European citizens. Europeans – in fact, almost all of them according to the latest Eurobarometer survey – are asking us for this action. Let’s make sure the policies we are defining allow us to get there.

Finally, Lagarde cites the German poet and playwright Johann Wolfgang von Goethe to close his speech to the Economic and Monetary Affairs Commission of the European Parliament, inviting perseverance in pursuing policies that reduce the consequences of the coronavirus pandemic: “As Johann Wolfgang von Goethe once said: in the realm of ideas, everything depends on enthusiasm, in the real world everything is based on perseverance”.

One Reply to “ECB: economy severely damaged, expansive fiscal policies are needed, no debt cancellation”

  1. Find out how the ECB promotes safe and efficient payment and settlement systems, and helps to integrate the infrastructure for European markets. Navigation Path: Home Research aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment”. When the severe economic downturn dissipates and before doubts about medium-term debt sustainability arise, use of the Pact’s general escape clause will need to be discontinued. Fiscal policies will then need to resume the adjustments provided for in the Pact.

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