European Central Bank (ECB) policy maker Olli Rehn criticized the political standoff over the region’s COVID-19 pandemic recovery plans, amid mounting concern that central bankers would again be forced to bear the brunt of supporting the economy.
The EU’s 1.8 trillion-euro (US$2.14 trillion) spending package — an enhanced multiyear budget and the Next Generation EU fund that ECB President Christine Lagarde last week said must be made operational without delay — are being held up by Hungary and Poland over conditions attached to the cash.
With renewed lockdowns likely to usher in a double-dip recession, the ECB is already planning more monetary stimulus next month. The risk is that if fiscal aid is curtailed, the central bank would be left with a bigger burden for the recovery at a time when its arsenal is already depleted.
“I find it irresponsible that the financial framework and the Next Generation EU have been made political footballs,” Rehn, a former European Commissioner, said in an interview from Helsinki. “I trust the member states will solve this issue.”
ECB officials have said that national governments and the EU must step up the fiscal response to the latest wave of the pandemic because monetary policy alone cannot create the demand needed to safeguard the economy.
“It’s important that fiscal policy continues to do its job and that’s why the Next Generation EU is of paramount importance for Europe’s economic recovery,” Rehn said.
Rehn, who is also the Bank of Finland governor, said the ECB’s 1.35 trillion-euro Pandemic Emergency Purchase Program (PEPP) and ultracheap loans known as targeted longer-term refinancing operations (TLTRO) are in his view the prime candidates for deployment to cushion the blow.
That echoes the consensus among policymakers that is emerging ahead of the bank’s Governing Council meeting on Dec. 10, when it has said it would take further action.
“Thanks to PEPP’s flexibility, the ECB is also able to provide overall monetary stimulus beyond addressing the fragmentation risks,” Rehn said, referring to the uneven impact of the virus across the continent. “The flexibility means both size and duration.”
Most economists predict about 500 billion euros of additional bond purchases, an extension to the program, and more long-term cheap loans. Officials have largely steered against expectations of a rate cut, due to the negative effect on bank profitabilty.
The uncertainty about the outlook has made eurozone lenders more nervous, with the ECB’s latest survey showing institutions expect credit standards to tighten further for companies in the fourth quarter.
This means policy makers “may need to consider the recalibration of TLTROs,” Rehn said.
Those TLTROs are currently three-year loans that banks can obtain for an interest rate as low as minus-1 percent — meaning the ECB pays them to borrow — as long as they lend the cash onto companies and households.
ECB chief economist Philip Lane also signaled on Sunday a “possible redesign, continuation or extension” of the lending program.
Rehn declined to go into specifics about the shape of next month’s package, saying he is “always concerned about too-high expectations in making monetary policy.”
He also urged governments to continue providing support through additional spending.
“It’s been one of the lessons of the previous crisis — I’m referring to the financial crisis and euro-area sovereign debt crisis — that monetary policy and fiscal policy need to work in tandem,” he said. “The essential question is how we can ensure that the current financing conditions remain at the current favorable level for as long as necessary.”
“The scarring effects of the second wave [of the pandemic] are likely to be significant, and it’s necessary therefore to maintain ample monetary and fiscal stimulus to alleviate these possible long-term effects,” he said. “It’s a better to be safe than sorry, and to avoid a premature tightening of financing conditions.”
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