Lagarde Says Ambitious, Coordinated Fiscal Aid Still Crucial
European Central Bank President Christine Lagarde said governments can’t afford to let up efforts to support the region’s economy through the pandemic-induced crisis.
“An ambitious and coordinated fiscal stance remains crucial, as a premature withdrawal of fiscal support would risk delaying the recovery and amplifying the longer-term scarring effects,” she told a meeting of the International Monetary and Financial Committee on Thursday.
She added the ECB’s own measures “can be recalibrated if required to maintain favorable financing conditions.”
Policy makers decided at their March 10-11 meeting to ramp up bond-buying under their 1.85-trillion-euro ($2.2 trillion) emergency program after yields rose. They observed that optimism prevailing among investors “seemed not to be shared by businesses and households, which had generally maintained a cautious stance,” according to an official account.
At the same time, the overall size of the program “was not being called into question.” Officials also noted that the economy would “rely quite heavily on fiscal support over the next two years.”
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Unless there’s renewed upward pressure on yields from abroad, we expect the front-loading that began last month to come to an end in June.
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Europe has faced criticism that its fiscal efforts are falling behind, with the International Monetary Fund warning about widening inequality and a divergence between countries’ recovery speeds.
While the lender upgraded its 2021 growth forecast for the euro area to 4.4% from 4.2%, prospects elsewhere are brightening more rapidly.
The U.S. economy is set to be turbo-charged by a $1.9 trillion economic relief package. At the same time, the euro area’s joint recovery fund hasn’t even been signed off on in all member states.
French Finance Minister Bruno Le Maire said in a Bloomberg interview on Wednesday that he’s “deeply concerned” at the slow implementation of the 750 billion-euro plan.
Several ECB officials have argued that national and joint efforts in Europe will provide significant support, even if they are smaller in size than in other parts of the world.
“These numbers will unlikely match the numbers in the U.S., but I do think the efficiency of the spending in Europe is a bit higher,” Dutch Governing Council member Klaas Knot said in a CNBC interview on Thursday. “At this moment I do think that the response is appropriate but if the response needs to be stepped up then I do think there is a willingness and preparedness on the side of fiscal authorities to step up.”
The ECB’s summary of its March meeting highlighted a similar point. Members of the Governing Council stressed that “one should not overlook that more fiscal stimulus was in the pipeline also in euro area countries.” It was also considered important that the recovery fund become “operational without delay.”
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