The president of the European Central Bank said that the region’s economy will need to be slowed from its fiscal and monetary stimulus “gradually” to avoid the repetition of mistakes made in previous crises, when support was withdrawn too quickly.
Christine Lagarde said there would be a “tricky situation” for policymakers to manage once the coronavirus pandemic is over and the economy starts to recover, recommending a switch to “flexible support” rather than “turning off all the taps at once. ”.
“Our commitment to the euro has no limits,” said Lagarde. “We will act while the pandemic is causing a crisis in the euro area.”
His comments in an interview with Le Journal du Dimanche came as economists expressed concerns that the slow implementation of vaccination in Europe and the delay in fiscal stimulus could cause its economy to lag further behind the United States and China.
After shrinking a record 6.8% last year, the eurozone economy is not expected to recover to pre-pandemic levels until mid-next year. In contrast, China has already rid itself of the economic impact of Covid-19, growing 2.3% last year, while the United States economy is expected to reach its pre-pandemic scale in the middle of this year.
Lagarde said that “Europe’s economic recovery has been delayed, but not derailed”. The ECB was still “convinced that 2021 will be a year of recovery,” she said, adding: “We expect the recovery to accelerate in the middle of the year, even if uncertainties persist”.
Erik Nielsen, chief economist at UniCredit, said in a note to customers on Sunday that he was “increasingly convinced that we are heading for another 3-5 years of underperforming European growth compared to the US”.
Allianz analysts warned in a recent report that Europe was facing “a five-week delay in vaccination that, if not corrected, could cost close to € 90 billion”. This is based on a calculation that each week of coronavirus restrictions reduces the quarterly growth of nominal gross domestic product by 0.4 percentage points.
Investors will be watching to see if the European Commission cuts its forecast for the eurozone economy this week, having forecast in November that it would grow 4.2% this year and 3% next year.
The ECB is expected to publish new quarterly forecasts next month and several members of its board of directors have told the Financial Times that they believe their 3.9% growth prospects this year look realistic, even if the short-term recovery is delayed.
However, a board member said the big negative risk is that delays in vaccination and new, more infectious strains of the virus could force governments to maintain strict restrictions for longer – “this is what really matters for recovery”. Lagarde hinted at these concerns when he said: “We are not immune to the unknown risks that arise”.
She urged the EU to “speed up” the process of ratifying national spending plans for the € 750 billion recovery fund to support the countries hardest hit by the pandemic. “You fight fire with fire,” she said. “It’s better to act quickly, even if you need to go back to fix things that may have gone wrong.”
Investors were encouraged by last week’s news that Mario Draghi, the former ECB president, had accepted an invitation to become Italy’s prime minister. Lagarde said he has “complete confidence” in Draghi’s ability to “restart the Italian economy”.
Last week, a group of more than 100 economists, including Thomas Piketty, signed a letter published by several newspapers asking the ECB to cancel the nearly € 2.5 trillion of public debt it has or convert it into perpetual bonds in exchange for more state investment.
But Lagarde dismissed the idea as “inconceivable”, echoing his earlier position, saying: “It would be a violation of the EU treaty that strictly prohibits monetary financing. This rule is a fundamental pillar of the common framework underpinning the euro. “