ECB Insists It Must Go Beyond Normal Tools, IMF Says Buckle Up

(Bloomberg) --

European Central Bank President Christine Lagarde said she has no choice but to go beyond conventional policies to combat the coronavirus crisis, in remarks delivered two days after a German court ruled that the institution’s bond-buying program may be illegal.

Speaking at an online panel with International Monetary Fund chief Kristalina Georgieva, a position she previously held, Lagarde said current circumstances are “exceptional.”

“We have to take all possible measures and policies to weather the shock,” Lagarde said in a webinar organized by Bloomberg. “We have the most unprecedented economic crisis in peacetime.”

Georgieva backed the view that policy makers must throw everything they’ve got at the recession.

“The message has to be to everybody: ‘Buckle up.’ We are on the road less traveled,” she said. “The best we can do in a situation like this is to learn together, cooperate as much as possible, and those that are stronger do more so those that are weaker can ride on measures taken elsewhere.”

What Bloomberg’s Economists Say

“The lockdown is the critical factor driving the plummet in global output. In the weeks and months ahead, easing of stringent controls will be key in enabling the beginning of a recovery.”

-Niraj Shah and Tom Orlik. Read their GLOBAL INSIGHT

Central banks have been at the forefront of supporting their economies in the face of the pandemic, which has shuttered businesses and put millions of people out of work. The IMF predicted last month that the “Great Lockdown” recession could lead to a global contraction of 3% this year, and warned that the subsequent recovery could be at risk if the virus persists or returns.

Georgieva praised the efforts of central bankers such as Lagarde, saying their actions make government efforts affordable.

“We do have plenty of liquidity and interest rates are likely to remain very, very low,” she said. “We can handle this increase in debt for some time.”

Germany’s top court cast a shadow over the ECB’s efforts on Tuesday though, ruling that a 2.7 trillion-euro ($2.9 trillion) asset-purchase program is potentially unconstitutional. Judges issued a three-month ultimatum for the ECB to justify its actions or risk seeing the Bundesbank be barred from participating.

While a newer 750 billion-euro pandemic purchase plan isn’t covered by that ruling, critics are already setting their sight on taking it to court as well. Lithuanian Governor Vitas Vasiliauskas said on Thursday the ruling was first and foremost “an internal German matter” that doesn’t set a precedent for the emergency program.

Speaking earlier Thursday, Vice President Luis de Guindos said the ECB is more determined than ever to support the 19-nation economy and signaled policy makers were ready to further expand monetary stimulus. After the economy shrank nearly 4% in the first quarter, output in the current period could decline at two or three times that pace, he said.

Asked about the ruling, Lagarde declined to give a specific view but said her central bank is “undeterred” in its mission to revive euro-area inflation, and by extension the economy, in line with its mandate.“We are a European institution with competence in the euro area,” she said, adding the ECB was accountable to European parliament and remained under jurisdiction of the European Court of Justice.

©2020 Bloomberg L.P.