ECB Urges More Economic Stimulus for Faltering Pandemic Recovery

(Bloomberg) -- Two of the European Central Bank’s top officials signaled the need for extra monetary and fiscal stimulus as the euro zone struggles to sustain its economic recovery from the coronavirus pandemic.

ECB President Christine Lagarde said that a “cliff effect” in which fiscal aid is withdrawn too soon is her greatest fear, while chief economist Philip Lane said it could be “prudent” to add extra monetary support to sustainably lift inflation.

The policy makers spoke shortly before France’s statistics agency predicted that the recovery in Europe’s second-largest economy will grind to a halt in the final three months of the year. Virus infections in the country, as in many others, have accelerated lately and triggered new restrictions on public life and travel.

“While we have seen recovery in late spring, early summer, we now fear that the containment measures that have to be taken by the authorities will have an impact,” Lagarde said in a Wall Street Journal interview recorded last Thursday and broadcast Tuesday.

Read more: French Economic Rebound Grinds to a Halt as Virus Crushes Growth

She expressed concern that the V-shaped recovery “we all longed for and hoped for” will develop a “second arm,” and singled out France and Spain as faring particularly badly.

Lane, speaking later Tuesday, said there is “considerable uncertainty” to the ECB’s baseline projections for the economy, and warned that accepting low inflation for a long period would be “very costly.”

“A less costly and more prudent approach is to add sufficient extra monetary policy accommodation to boost inflation momentum,” he said. He added that a “forceful” fiscal response is also needed near term.

Virus Resurgence

Both policy makers reiterated that the central bank is prepared to use all of its tools if needed, but stressed the importance of governments and central banks cooperating.

“What is critical at the moment is fiscal policies and monetary policies working hand in hand and making sure that we don’t have this sort of cliff effect that we would have if measures are withdrawn too quickly,” Lagarde said. “That’s what concerns me most at the moment.”

Bank of Spain Governor Pablo Hernandez de Cos echoed that sentiment in separate remarks, telling lawmakers in Madrid that the early removal of fiscal measures in Spain and the euro area would have a negative impact that “would exceed the potential cost of maintaining the measures until the recovery showed sufficient strength.”

Irish central bank chief Gabriel Makhlouf told CNBC that the ECB has made a “very big contribution” but “fiscal policy is absolutely the main player in these particular circumstances.”

Lagarde also said officials are “very attentive” to the exchange rate, after a jump in the euro this year weighed on inflation by depressing import costs.

The downward pressure on consumer prices, which are falling for the first time in four years, has economists predicting the ECB’s 1.35 trillion euro ($1.6 trillion) emergency bond-buying program will be expanded this year. That’s seen as most likely in December, when new economic forecasts are published.

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