The European Central Bank pulls out the big guns

19th January 2021
-IAM, News

Hugues Chevalier, Economist

During its last meeting of the year, on December 10th, the European Central Bank (ECB) has further strengthened its support of the economic activity with an extension of 500 billion euros, bringing its intervention to 2.4 trillion euros since the start of the health crisis. This new boost follows the further deterioration of the economic situation in the euro zone, a consequence of the second wave of the pandemic. Indeed, the ECB has revised downwards the economic growth in the euro zone in 2021 by more than one point, to 3.9%, against 5% last September. The ECB is therefore further strengthening its assets buyback program under the pandemic emergency purchase plan (PEPP) which now stands at 1,850 billion. The PEPP allows states to borrow at interest rates close to zero, or even at negative rates (Germany: -0.6%, France: -0.5%). This “free” source of financing allows governments to finance short-time working, structural economic support plans, etc. In the middle term, these loans will obviously have to be paid back. But now, their costs for the different countries are close to zero. In addition, the PEPP also allows commercial banks to borrow at -1.0% (commercial banks are paid to borrow!) from the ECB. But only at the condition that they offer these credits to the private sector. This specific tool, TLTRO 3, has enabled keeping corporate interest rates at around 1.5%. Given the depth of the economic recession, the role of the ECB has become more essential in supporting the economy. But this will be not enough to boost the activity in 2021 and a coordinated fiscal policy in Europe must be added. Hopefully, the European Union’s 750 billion stimulus package, finally approved on December 10th, after being blocked by Poland and Hungary for weeks, will eventually be operational soon.