ECB Signals Euro-Area Slump Has Hit Bottom, Recovery Uncertain

(Bloomberg) --

The euro zone has hit the low point of its virus-triggered economic slump though the path of recovery remains highly uncertain, European Central Bank officials signaled.

After lockdowns to contain the pandemic plunged Europe into its worst postwar recession, countries across the region are finally starting to gradually reopen businesses.

“I think we’ve hit bottom in terms of the contraction,” ECB Vice President Luis de Guindos said in an online discussion.

Still, his Executive Board colleague Philip Lane, the institution’s chief economist, noted at a separate event that projections are exceptionally difficult. The ECB has multiple scenarios, the most-optimistic of which sees a return to pre-virus levels next year and the gloomiest forecasting that won’t happen before the end of 2022.

“The big question is in the coming quarters and years how quickly will households convert to saying: ‘OK, I’ve saved enough. Now I’m ready to consume again,’” he said. “All of our scenarios have essentially interruptions to economic life throughout the next year.”

International Monetary Fund Chief Economist Gita Gopinath warned on the same panel as Lane that a key risk is whether there will be a second wave of the virus.

“The fog of uncertainty has barely lifted,” she said. “No country has been spared.”

In Europe, the ECB has been at the forefront of the crisis fight, pledging to buy more than 1 trillion euros ($1.1 trillion) in debt this year as government ramp up borrowing to keep their economies afloat. Policy makers have also offered generous terms on loans to banks in an attempt to keep them providing credit to companies and households.

What Bloomberg’s Economists Say

“Now that the region is starting to exit from lockdown, some of the smoke clouding the outlook for the euro-area economy should dissipate. Still, a lot of uncertainty will persist, dragging down activity well into next year.”

-Maeva Cousin, read her EURO-AREA INSIGHT

That’s been complemented by fiscal stimulus from individual nations, though governments have squabbled over the details of joint support. Lane said it’s important that politicians have the patience to make sure that support is maintained.

The longer term will be dominated by the “big questions” of public finance, he said.

One of those questions is how to sustain the massive increases in debt as governments try to shield companies and workers during the pandemic and rebuild the economy when it has passed. Politicians in stressed economies such as Italy have bridled at the insistence by their neighbors including Germany and the Netherlands that aid is provided as loans rather than grants.

Guindos, who was Spanish finance minister during the global financial crisis when his country’s banks were rescued, urged governments to recognize that tools such as credit lines from the currency union’s bailout fund can help.

“That bank rescue is one of the fundamental pillars on which the much more robust economic recovery of the Spanish economy was based, compared to the average in the euro-area,” he said.

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