Lagarde pushes coronavirus emergency to governments

Lagarde pushes coronavirus emergency to governments

ECB president’s response to crisis disappoints markets.

By BJARKE SMITH-MEYER 3/12/20, 7:45 PM CET Updated 3/12/20, 7:48 PM CET

https://www.politico.eu/article/christine-lagarde-european-central-bank-dumps-coronavirus-emergency-in-leaders-laps/

Christine Lagarde, president of the European Central Bank, speaks to the media about measures against the coronavirus at ECB headquarters on March 12, 2020 in Frankfurt | Thomas Lohnes/Getty Images

The European Central Bank decided Monday against deploying its big guns to fight the coronavirus, declaring that governments should take the lead in battling the economic impact of the outbreak.

ECB President Christine Lagarde, facing Europe's first major crisis since she took up the post last year, repeatedly called for “an ambitious and coordinated fiscal stance” of public spending to help bring the economy back from the brink.

Lagarde spoke after the ECB approved a series of measures that fell short of analysts' expectations, tanking markets.

The Frankfurt-based authority said it would provide banks with cheap loans to prevent a credit crunch, as the pandemic forces businesses to close its doors.

The governing council of the eurozone's central bank also unanimously decided to increase its politically controversial bond-buying program by €120 billion this year, with particular focus on corporate bonds.

“The response should be fiscal, first and foremost” — ECB President Christine Lagarde

But the governors decided against lowering interest rates further into negative territory — declining to follow the emergency rate cuts by the U.S. Federal Reserve and the Bank of England.

“The response should be fiscal, first and foremost,” Lagarde told a news conference, tapping on the table in front of her for emphasis. “I don’t think that anybody should expect any central bank to be the line of first response.”

Financial markets did not respond well. Stock markets on both sides of the Atlantic plunged with ECB-watchers laying the blame directly on Lagarde.

“This may have been the worst central bank press conference, I have seen in my 10yr career,” Nordea Markets' chief global foreign-exchange strategist, Andreas Steno Larsen, tweeted. “After all it probably wasn't a super good idea to appoint a lawyer to this job.”

Lagarde, asked about traders' reaction, said the ECB's measures were comprehensive and would do the job.

“As to market, it takes a little bit of time for decisions to be analysed, dissected and appreciated,” she said.

To a question about why the ECB hadn’t followed the Fed and Bank of England, Lagarde responded, “Comparisons are odious.”

Pressure on ministers

The meeting, whether due to Lagarde's rhetoric or investors' expectations, heaps pressure on eurozone finance ministers. They’re scheduled to meet Monday in Brussels to agree on a range of coordinated policies to handle the spread of the coronavirus and stop the economy from falling into the abyss.

Almost 130,000 people have caught the deadly disease worldwide, with over 4,700 dead. Around 81,000 cases have been recorded in China. Italy is next in line with about 13,000 infected.

The eurozone economy will take a direct hit from the pandemic. ECB staff on Thursday downgraded their prediction for economic output this year to 0.8 percent. In December, they expected 1.1 percent.

Inflation will only increase by 1.1 percent in 2020, Lagarde said — far below the ECB’s target of close to but below 2 percent, and another sign of economic weakness.

The European Commission is preparing a “menu of policy responses” for treasuries to consider.

“The economy will bounce back,” Lagarde said in the news conference, but stated the timing remains uncertain.

“We consider the current shock is severe but still temporary if the right set of policy measures is decided by all players,” she said, in another call on governments for action.

Policy responses

The European Commission is preparing a “menu of policy responses” for treasuries to consider. Ministers’ deputies are supposed to get a readout of the measures in a telephone conference Friday evening.

Part of that response includes putting the EU’s deficit rules on ice while allowing state aid for companies that are on the brink.

The European Investment Bank, meanwhile, could use its financial muscle to support EU hospitals and health care research to combat the virus.

Lagarde added that “there will be a decisive and determined move” at next week’s Eurogroup on the “collective fiscal response that we’ve been calling for.”

Analysts were expecting the ECB to make a bigger splash. Some even invoked the “whatever it takes” speech that the ECB’s former president, Mario Draghi, delivered in 2012 to save the euro from collapse during the sovereign crisis.

Lagarde dismissed the comparison.

“I don’t have a claim to history, to be a ‘whatever it takes,’ number two,” Lagarde said. She added that “there will be a decisive and determined move” at next week’s Eurogroup on the “collective fiscal response that we’ve been calling for.”

In any case, the ECB would be ready to act with further measures, including rate cuts, if the economy continues to deteriorate, Lagarde said.

Until then, she said, the eurozone’s biggest threat in the face of coronavirus would be “the complacency and the slow-motion process that would be demonstrated by the fiscal authorities of the euro area in particular.”

This article is part of POLITICO’s premium policy service: Pro Financial Services. From the eurozone, banking union, CMU, and more, our specialized journalists keep you on top of the topics driving the Financial Services policy agenda. Email pro@politico.eu for a complimentary trial.