How Have European Central Banks Responded?

As European nations react to the spread of the novel coronavirus, leaders across Europe, from the European Central Bank, European Commission, and national governments, are deploying a host of policy tools to contain the economic fallout. 

• Like in the United States, the impact of monetary policy actions is likely to be limited. With interest rates already near zero across Europe, further lowering borrowing costs will only get the economy so far. Policymakers are instead turning to unconventional monetary policy tools like asset purchases to increase the supply of money in the economy. However, with shuttered businesses and stay-at-home orders, and rising unemployment and loss of income, monetary policy alone is unlikely to jumpstart consumer spending and business investment. 
  
  Complementary fiscal responses are emerging, and the UK has been leading by example:  Employers who place workers on furlough (temporary leave) receive grants from the government worth 80% of total wages. Norway, Denmark, Ireland, and the Netherlands have similar plans. While this policy was not necessarily coordinated across these five nations, it has emerged as a policy of best practice. 
   
• The COVID-19 pandemic has reopened old fissures between EU members. Leaders signaled a lack of coordination when meetings between Euro users and the wider EU ended with no consensus on how to support countries most ravaged by the coronavirus. The issue was delegated back to regional finance ministers, and will be revisited in two weeks. 
  
  Nine of the 19 Eurozone countries have called on the EU to issue debt, or ‘Corona Bonds’, to help nations raise long-term funding to respond to the pandemic. Germany has refused to support this plan, worrying that issuing debt at the EU-level means German taxpayers are underwriting spending by poorer member states. Additionally, France, Germany and Italy want to re-deploy the crisis-era European Stability Mechanism (ESM), but infighting is emerging as some nations worry about associated austerity requirements.
   
• The crisis response needs to build solidarity among Eurozone states. The ECB’s €750 billion asset purchasing program is a good start, but it can do more. First, the ESM ought to be deployed to struggling nations, particularly to those that have already contributed large sums to the ESM. Second, the EU ought to activate the European Union Mechanism of Civil Protection for the supply of medical equipment for individual protection, which would require Germany and France to lift their restrictions on the external sale of face masks. This would also improve geopolitical relationships in Europe, as China and Russia have stepped in to supply medical equipment to Italy in the absence of European support. Third, EU commissioners should tell finance ministers not to act unilaterally, despite the fact that no resolution was formed on March 26, to avoid beggar thy neighbor outcomes. The Italian ambassador to the EU, Maurizio Massari, wrote in a recent op-ed,  “The coronavirus crisis is a test of the EU’s cohesiveness and credibility — one that can only be passed through genuine, concrete solidarity.” 

Below, we take a look at the emerging economic policy decisions in France, Germany, the UK, and by the ECB to highlight the differences and similarities in crisis strategies.

How has the European Central Bank responded?

In 2008, the Eurozone aligned its strategies for rescuing different nations. In September 2008, the EU introduced the €200 billion European Economic Recovery Plan to provide long-term investments into struggling Eurozone countries, and shortly afterwards introduced the European Financial Stabilisation Mechanism (EFSM) which aided ‘periphery’ nations such as Greece, Ireland, and Portugal. In sum, the UK and EU bailed out financial institutions across multiple jurisdictions, then recovered the costs through austerity measures aimed at reducing public spending. 

Asset purchases

On March 18, the ECB announced its Pandemic Emergency Purchase Program (PEPP), which consists of €750 billion in asset purchases over the coming nine months. Just one week before, the ECB had announced plans to buy €120 billion in government and corporate bonds, but the market barely reacted and continued its freefall. 

Interest rates

The ECB’s interest rates remain at zero and the interest rate that it charges banks to park money in its virtual vaults is already negative 0.5%. This a de facto penalty on deposits, thus encouraging commercial banks to lend their cash instead of hoarding it.

New policies

As part of PEPP,  the ECB determined that it would loosen credit standards and buy riskier assets including Greek debt that had been historically excluded due to the  government’s low credit rating. This is the first time that the low-rated Greek government bonds have featured in an EU asset purchase program. By increasing demand, these purchases drive down the interest rates that debt issuers need to pay.

Communications

Christine Lagarde remarked after PEPP announcement, “There are no limits to our commitment to the euro.” Lagarde’s words echo the bazooka speech of former ECB President Mario Draghi in 2012 when he said, “The ECB is ready to do whatever it takes to preserve the euro.” Analysts slammed Lagarde for implying that widening spreads between Italian and German bond yields was not the ECB’s problem. Coordination on behalf of Germany, Italy, and the ECB remains just as critical now as it did in 2011. 

How has England responded?

Asset purchases

The Bank of England announced that it would buy £200 billion in UK government bonds and corporate bonds to raise its balance sheet value to £645 billion. The Bank’s new governor, Andrew Bailey, gave no timeline for the purchases in order to give the governors maximum flexibility. 

Interest rates

On March 19, the Bank of England cut interest rates to 0.1%, the lowest level since its founding in 1694. Just one week before, the BoE had cut rates from 0.75% down to 0.25% in its first unscheduled meeting since the 2008 financial crisis. 

New policies

After the initial interest rate cut, the BoE launched a Term Funding Scheme (TFS), offering cheap funding for bank lending to small and medium-sized firms while simultaneously cutting the requirements for banks’ capital buffers to further ease credit conditions. While these two measures alone are not new, the policies taken in tandem lay the groundwork for newly freed up capital to flow into struggling small businesses.

Communications

The Bank of England had a change of leadership on March 16 as Andrew Bailey replaced Mark Carney who had served in the role for nearly seven years. Although Carney remarked in his last press conference on March 11 that “There is no reason for this shock to turn into the experience of 2008… if we handle this well,” Bailey’s actions thus far have indicated that this time things may actually be more severe. The BoE published a joint letter with seven of the UK’s largest banks which highlighted the industry’s commitment to upholding the UK economy. 

How has Germany responded?

Asset purchases

While the German Bundesbank does not have the same liberties as the BoE, the German government announced a €500 billion bailout package that will allow the public authority to take stakes in failing companies. Since the Bundesbank defers to the ECB on many aspects of monetary policy, its tools are limited. 

New policies

Finance ministers are seeking to suspend Germany’s “debt brake”, a clause in the German constitution that limits new government borrowing to just 0.35% of GDP. This decision would represent a decisive break with the administration’s adherence to the “black zero” policy of balanced budgets and no new borrowing. German ministers also announced that the government will guarantee 90% of loans made through the bank KFW, a German development bank. 

Communications

Finance Minister Olaf Scholz and Economics Minister Peter Altmaier announced a pledge of unlimited cash to the struggling economy. Using terms that also reminded analysts of Draghi’s 2012 speech, Scholz stated, “This is the bazooka, and we will use it to do whatever it takes.” Chancellor Angela Merkel has decided to self-isolate after learning that her doctor was diagnosed with Coronavirus. 

How has France responded?

Asset purchases

Similar to the German Bundesbank, the French Banque de France has had a limited response to the coronavirus crisis. Nevertheless, the European Commission on March 21 approved a €300 billion liquidity package proposed by France to help French companies suffering as a result of the economic slowdown. 

New policies

French policymakers have been pushing the ECB to activate the European Stability Mechanism (ESM) fund, which has €410 billion in unused lending capacity. Italian Prime Minister Giuseppe Conte has also advocated for this approach saying, “The route to follow is to open ESM credit lines to all member states to help them fight the consequences of the COVID-19 epidemic.” Germany provides 27% of the capital for the fund. 

Communications

On March 16, President Emmanuel Macron stated, "No French company, whatever its size, will be exposed to the risk of collapse." President Macron went on to say that utility and rent payments for struggling businesses would be suspended to ease the debt burden.