The plunging markets of Thursday proved what everyone already knew. Central banks are running out of ammunition and can’t do much to prevent an economic downturn. It’s every country for itself as the novel coronavirus smashes its way through one economy after another.
Christine Lagarde, the new president of the European Central Bank who replaced Mario Draghi last November, pretty much said as much on Thursday when the ECB launched an apparently underwhelming response to the economic damage unleashed by the virus and its resulting COVID-19 disease.
Even as she was speaking, the European (and North American) markets were plunging. Almost all the major stock indexes were down about 9 per cent, with some indexes falling more than in the 2008 financial crisis. President Donald Trump’s European travel ban, and the relentless spread of COVID-19 through Europe, could take some of the blame for the wreckage.
The yields of the 10-year bonds of Italy, the epicentre of the European COVID-19 infections, soared (bond prices and yields go in opposite direction), raising the borrowing costs of the EU country that can least afford it. “We are not here to close [bond] spreads, that’s not the function of the ECB,” Ms. Lagarde said, leaving economists wondering exactly what the ECB’s job is if not to stabilize the debt markets.
Hers was not a whatever-it-takes moment. There has only been one such moment in recent ECB history. It came in 2012, when the financial system and national debt crises were conspiring to burn down the euro zone. Mr. Draghi promised to do “whatever it takes” to save the economy. He used a series of radical emergency measures, which would include quantitative easing – the mass buying of government bonds – to snuff out the flames. It’s no exaggeration to say he saved the euro from destruction.
To investors’ surprise, the ECB did not cut interest rates Thursday, setting it apart from the central bank pack. Since last week, the Bank of England, the Bank of Canada and the U.S. Federal Reserve each cut rates by a hefty half a percentage point. The ECB left its base rate intact, at negative 0.5 per cent. It seems the ECB reasoned that pushing rates further into negative territory would do nothing to cure the supply shock brought on by the coronavirus crisis, or make the banks any healthier; banks hate negative rates.
The ECB did help the banks boost their liquidity in an effort to support the supply of credit to the economy. It is launching a new program of cheap longer-term loans for banks and sweetened another bank-loan package that will be offered for as little as minus 0.75 per cent – below the ECB’s deposit rate.
The ECB also ramped up its quantitative easing program, which will now see monthly bond purchases, including corporate bonds, of €33-billion ($51.4-billion), up from €20-billion. The higher purchases will help government financing operations, although a bigger program would have been more effective. Remember, central banks can’t go broke. They alone issue currencies and can buy as many bonds as they wish.
The overall stimulus package clearly wasn’t enough to slow the market sell-off or contain the unfolding economic damage. To be fair, there wasn’t more the ECB could do, other than boost the quantitative easing program more than it did. That option is still on the table.
The ECB’s message was: We’re almost tapped out, over to you finance ministers.
Ms. Lagarde pleaded for governments to get their acts together to launch “ambitious and co-ordinated” fiscal stimulus packages to prevent the economy from barreling into recession (Germany and Italy were on the verge of recession even before anyone had heard of COVID-19).
Mr. Draghi would also beg governments to smarten up, to little avail. During most of his years at the ECB, from 2011 to 2019, governments did little to make their economies more competitive and were obsessed with austerity, a policy that would prove disastrous. It made the poor poorer, stoked the rise of populist leaders and eroded public services, such as hospital care. While the worst of austerity is over, it still lingers, especially in Germany, whose spending programs are allergic to deficits.
The postcrisis years turned the European political map on its head as governments everywhere were voted out of office by angry voters, hollowing out the traditional centre-right and centre-left parties. Unless governments pull together on the fiscal front, mass anger could return.
Ms. Lagarde could have injected a little more brio into her stimulus package on Thursday, but not much more. She’s right. The ECB saved Europe eight years ago. It doesn’t have the power to do it again. Over to governments.
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