As the coronavirus continues to impact upon the global economy, the President of the European Central Bank (ECB) Christine Lagarde has launched an emergency €750 billion package to ease the impact of the pandemic. It will buy government and company debt across the eurozone, including the troubled member states of Italy and Greece.
Details of the ECB Package
However, it will only be a short-term asset-purchasing scheme and it will end once the ECB determines that the Covid-19 crisis phase is over. Furthermore, the US Federal Reserve stated it would cooperate with other central banks to boost the availability of dollars for commercial banks. This is an important tool that was used to preserve stability during the 2008-09 financial crisis.
What Motivated the ECB’s Decision?
The ECB President’s actions have been motivated purely by politics. Lagarde said herself that “there are no limits to her commitment to the Euro.” The ECB is restricted to purchasing up to 33 percent of a member state’s debts, which shows that the central bank is willing to smash its own fiscal rules in order to preserve the single currency.
Before Covid-19 spread throughout the globe, many journalists were anticipating that Italy would crash out of the Eurozone at some point. The ECB President’s latest move shows that she will not let a global pandemic destroy the Euro by buying not only Italy’s debts, but Greece’s, too.
Even the Daily Telegraph’s Jeremy Warner writes that many EU member states have spent so much political capital on the European Monetary Union (EMU) that policymakers are determined to prevent the coronavirus from destroying the eurozone, even if that means the single currency has to stagger on.
The reality is that the EU is doing everything it can to minimize the impact a recession is going to have on the European economy. The Organization for Economic Cooperation and Development (OECD) slashed the Eurozone’s growth rate to 0.8 per cent from 1.2 per cent earlier this month.
European Commission President Ursula von der Leyen has promised “maximum flexibility” in the implementation of state rules and the Stability and Growth Pact. In addition, member states are holding on to €8 billion of unspent funds that would be redirected to urgent needs related to the pandemic, which could potentially unleash €37 billion.
No Guarantees That the Eurzone Will Survive Post-Coronavirus
But this stimulus will not solve the eurozone’s problems in the future. As Doug Holtz-Eakin, the President of the American Action Forum and a former top economic adviser to George W. Bush and John McCain, told NY Mag when discussing the same situation in America, there is no evidence that supply shocks can be fixed through fiscal stimulus. Demand is likely to rise sharply once the number of Covid-19 cases drops over time, and that will boost economic activity. Fiscal measures only increase debt in the longer term, which will not help any European states when this is over.
Many EU members know that the financial consequences of tearing apart the Eurozone will be catastrophic. Martin Wolf of the Irish Times stated that the single currency can survive through the creation of cross-border finance and it must be easier for Eurozone states to restructure debt. Banking and capital unions are vital to ensure the single currency survives. Of course, all single currency members would need to agree with each other that this needs to happen, and the current climate might persuade many nations to adopt measures that can preserve the Euro’s existence.
Nonetheless, the Eurozone’s survival beyond the coronavirus is not guaranteed. It will require a tremendous amount of political will to persuade all Eurozone states to strengthen the mechanisms necessary to secure the single currency’s future. It remains yet to be seen whether that will happen or not.