The ECB’s chief economist speculates that GDP might fall by 5-12% this year
joined the European Central Bank nearly a year ago, he hardly expected to be fighting off the economic effects of a pandemic. The bank’s preoccupations back then seem quaint now. The euro area’s economy was sputtering and thewas forecasting a growth rate of 1.4% for 2020. Now Mr Lane, the bank’s chief economist, speculates thathas cooked up an alphabet soup of schemes—including the Pandemic Emergency Purchase Programme , which will buy bonds worth €750bn .
The job of central banks in the crisis is to ensure that the conditions for a recovery are in place, and to stabilise panicking markets. Mr Lane identifies an extra role for the, as the central bank of a monetary union: to avoid an “unwarranted” tightening in financial conditions resulting from investors dumping riskier government debt for safer bonds. The flight to safety, first analysed by Mr Lane and others during the debt crisis, is what thenow tries to tackle.
Modest levels of spreads may be desirable, but not huge gaps. Debt-laden Italy and Spain have been hit hard by the virus, but have spent relatively little on stimulus. What if they lose access to markets? If countries face solvency trouble, says Mr Lane, other tools must kick in—eg, the euro area’s bail-out fund. That could help to unlock unlimited bond purchases by theHigher public debt will be a feature of the post-pandemic landscape.
For now, the incentives of monetary and fiscal authorities align neatly. With policy rates at or below zero, central banks are devising new ways to lower borrowing costs. That suits governments, which are issuing vast quantities of debt to fund stimulus. Expect a clash, though, when central banks decide raise interest rates. You could imagine politicians in America or Britain appointing a pliable central-bank head.
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