Europe’s Central Bank, in About-Face, Swoops in to Save a Virus-Afflicted Continent

Only a week after implying she didn’t care about shielding more debt-troubled economies, the ECB's Lagarde reveals a 750 billion-euro fix. But the bitter trade war with U.S. resumes.

Christine Lagard, the president of the European Central Bank, speaks in Frankfurt, Germany, on March 12.
Christine Lagard, the president of the European Central Bank, speaks in Frankfurt, Germany, on March 12. Thomas Lohnes/Getty Images

The European Central Bank swooped in Wednesday night with a 750 billion-euro fix to avert an immediate economic crisis in Europe from the coronavirus pandemic, throwing a vital lifeline to debt-strapped countries that plan to spend furiously to limit damage but are leery of the solvency problems they suffered in the last financial crisis.

Yet with emerging markets under siege and developed economies elsewhere screeching to a halt, there are no signs yet of the broader international cooperation needed to get to grips with the biggest economic disaster in a decade or more. On the contrary, U.S. President Donald Trump on Wednesday reaffirmed that he would continue his trade war with Europe.

“We are facing an absolutely unprecedented challenge; it never happened during the financial crisis, it never even happened in wartime,” said Alicia Coronil Jonsson, the chief economist at Singular Bank, a Spanish private bank. “With so much debt in Italy and Spain, the ECB intervention was really needed.”

And memories are still fresh of how fragile Southern European economies nearly blew up the entire European project during the last crisis—making the ECB move a bid to help not just Southern Europe but the whole economic and financial cohesion of the continent.

“The challenge that Spain, Italy, and France are up against—it could be systemic for the whole eurozone,” Jonsson said. “That’s why this intervention isn’t just to narrow bond spreads, but to give the whole zone more stability.”

Even as EU nations have announced massive new stimulus plans to provide short-term relief as lockdowns close entire economies, some affected countries such as Italy, Spain, and Greece suffer from higher borrowing costs than other countries, like Germany, which threatened to tie their hands as they try to stanch the bleeding. Those different costs are reflected in bond spreads, which have been widening since the crisis began.

Only a week ago ECB chief Christine Lagarde suggested those spreads weren’t her problem, but she appears to have changed her mind after getting attacked by critics in the more vulnerable EU member states. On Wednesday the ECB stepped in with a surprise move to spend up to 750 billion to purchase bonds and other securities. The Pandemic Emergency Purchase Program, the European Central Bank’s belated rejoinder to the U.S. Federal Reserve’s own embrace of similar measures, will run through the end of the year at least and has already brought a measure of relief to hard-pressed government bonds in places like Spain, Italy, and Greece.

As striking as the size of the ECB’s intervention was the tone of the message it sent, one of commitment to do absolutely whatever is needed to stem the runaway crisis—pledging, the bank said, to do “as much as necessary and for as long as needed,” keeping open “all options and all contingencies.”

“They were trying to channel this ‘whatever it takes’ spirit, a message that had been in doubt until yesterday,” said Claus Vistesen, the chief eurozone economist at Pantheon Macroeconomics. “They had to say, ‘We have a bazooka, we have a printing press,’” to reassure markets that no measures are off the table, he said.

“To the extent that governments, and especially those in Southern Europe, have to mobilize a lot of fiscal resources, the ECB is getting behind that effort,” he added. “Spreads were getting out of hand, and the ECB felt it had to correct the mistake it had made.”

Buying some time and freedom for European countries to borrow more, despite hefty government debt already, is getting more important by the day because Italy, Spain, France, and others are one-upping one another with hugely ambitious spending plans to bolster unemployment insurance, increase paid sick leave, and backstop loans to small businesses.

The free spending marks a sharp departure for many European countries, which have been forced to keep deficits small and worry about spending. But, like the United States, which even before the coronavirus crisis blew its budget deficit wide open and added a huge amount of debt, countries are worrying less about how they’ll pay for the economic response—and almost certainly the extra spending needed for recovery.

“The notion that there shouldn’t be too much worry about debt is quite apt. With secular stagnation, with interest rates lower for longer, you can borrow interest free in the current conditions, and I don’t see that changing anytime soon,” said Nicolas Véron of the Peterson Institute for International Economics.

But no one should think even the colossal amounts being pledged will be a cure-all.

“There’s no way to make this a pleasant moment—there will be disruption no matter what,” Véron said. “It’s a matter of damage control.”

Even so, Spain, scarred by memories of the beating it took on debt markets in the last financial crisis, was hesitant just days ago to announce a hefty stimulus package. But it changed course on Wednesday and said it would provide at least 100 billion euros in public aid, with a total package that could rise to 200 billion; France, Britain, and Italy have all redoubled their own multibillion-dollar emergency packages as the economic carnage from the pandemic has become clearer, with major economies coming almost to a standstill.

But if the immediate crisis in Europe seems to be averted, fresh brush fires are spreading for the global economy. Manufacturing is increasingly being disrupted by supply chain and safety concerns, with European and U.S. automakers closing their doors temporarily. Emerging markets are getting walloped by the crisis, with massive outflows of capital, threatening many of the nations that were expected to provide a boost of growth this year. The reverberations of the economic crisis have driven forecasters to increasingly gloomy projections of global growth.

The United States, the eurozone, and Japan are already in recession, said Robin Brooks, the chief economist at the Institute of International Finance, who just slashed his global growth outlook even further, to 0.4 percent. But even that assumes a second-half recovery, which could get derailed by rising credit stress as the economic pain of lockdowns and travel bans percolate through all economies, he noted.

So far, most countries have tried to tackle the economic fallout on their own. While the U.S. Fed has increased swap lines with a number of countries, which could help alleviate a shortage of U.S. dollars that grease the global economy, international cooperation more broadly has been conspicuous by its absence.

China and the United States, the two biggest economies, are trading insults and blame for the virus as the bilateral relationship goes off the rails. Trump has only redoubled his “America First” message by reportedly seeking to poach a German-made vaccine for exclusive use in the United States and maintaining his costly trade war despite pleas to remove barriers to trade. Trump’s trade war with China, including tariffs on many imported medical supplies, has directly undermined the U.S. ability to respond to a medical emergency—as the administration was explicitly warned about. His maintenance of tariffs, reiterated Wednesday, is further straining relations with other big countries right when more cooperation, not confrontation, is needed.

“Coordinated action is needed, and it’s needed soon,” said Matthew Goodman, senior vice president at the Center for Strategic and International Studies, noting the broad international cooperation in the immediate aftermath of the 2008 financial crash that helped craft a joint monetary and fiscal response to the shock. And major economies, like those in the G-20, can prod the International Monetary Fund, the World Bank, and other multilateral bodies into playing a more proactive role, rather than leaving each country to fend for itself.

“There are a bunch of things that need to be done that would be force multipliers; individual countries can only go so far,” he said.

Saudi Arabia, the current head of the G-20, has convened a virtual meeting of the group next week, but Goodman says he doesn’t have high expectations of a concerted approach; Saudi Arabia, after all, helped detonate the current market meltdown by starting an oil price war with Russia.

“The United States and China, the EU, the big EU member states, Japan—this isn’t going to work unless these countries say, ‘We’re willing to work together,’” Goodman said. “I’m not holding my breath.”

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP

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