ECB concern grows over slow progress on stimulus

Christine Lagarde, president of the European Central Bank, speaks during a live stream video of a recent news conference in Frankfurt, Germany. Photo: Chris Ratcliffe/Bloomberg

Alexander Weber

March 22 2021 02:30 AM

The European Union’s path to joint fiscal stimulus is looking less assured than its monetary guardians would like, casting further clouds over an outlook already stunted by the bloc’s botched vaccination drive.

European Central Bank President Christine Lagarde last week gave a hint of alarm to lawmakers on the slow rollout of the €750bn pandemic recovery fund. That heaps pressure on EU leadership to get its flagship tool right, especially with other parts of its crisis response faltering.

The US’s more advanced immunisation push and President Joe Biden’s $1.9trn stimulus that is already posting cheques to citizens highlight Europe’s contrasting shortcomings. ECB officials know that the onus will be on them to stimulate the economy more if fiscal help isn’t there.

“They’re looking at what’s going on the other side of the Atlantic and it becomes clear that what Europe is doing is inadequate,” said Nick Kounis, an economist at ABN Amro Bank. “There’s a concern that without the same fiscal effort in Europe, the output gap is going to remain in place.”

Ms Lagarde noted the difference in strategy from the US in the European parliament on Thursday, but also suggested it’s a good reason why governments shouldn’t dawdle.

“Rather than lamenting the insufficiency, the different pace, the diverging impact, all of us should put all the energy we have in making sure that we deliver, and that implementation follows through as quickly as possible without too much procrastination,” she said. “The sense of panic in the EU about securing enough supply for all 27 member states, coupled with vaccine hesitancy, is risking economic confidence in the region.”

Payments under the recovery fund should start around the middle of the year and are stretched over several years.

Most governments’ submissions to the EU still need work and just 13 of the 27 member states have approved a provision that allows the Commission to finance the fund in the bond market.

The bloc’s slow vaccination roll-out has meant extended restrictions and almost certainly another economic contraction this quarter, a predicament that will focus minds at an EU summit on Thursday.

The eurozone economy is currently projected to return to its pre-pandemic size only in the middle of 2022, a year behind the US.

“My concern is that, compared with the enormous US fiscal impulse, the effects of the European one will kick in with a major delay,” ECB Governing Council member Peter Kazimir said. “The joint fiscal reaction is lagging behind and needs to pick up its pace to support the recovery.”

In comments to Les Echos the same day, ECB Executive Board member Isabel Schnabel also wondered if the EU effort may be inadequate.

“The US measures are bigger,” she said. “It may be that the European support will turn out to be insufficient.”

While Ms Lagarde acknowledged spending plans should be “well-designed,” she reminded lawmakers of her challenge while the EU Commission does due diligence. Bond yields are rising because of an expected US inflationary boom, forcing the ECB to accelerate stimulus to stop that stoking higher borrowing costs for companies and households.