The coronavirus pandemic is a collective public health emergency unprecedented in recent history. It is an unbearable human tragedy played out across the world and our thanks go to the dedicated health workers on the frontline of our health systems. It is also an extreme economic shock that requires an ambitious, coordinated and urgent policy reaction on all fronts to support people and firms at risk.
Unlike in 2008-9, the shock we are facing is universal: it is common both across countries and across all sections of society. Everyone has to scale back their daily activities, and therefore their spending, for as long as the containment measures last. Essentially, for a temporary period, a large part of the economy is being switched off.
As a result, economic activity across the euro area will decline considerably. Public policies cannot prevent this. What they can do is ensure that the downturn is no longer and deeper than it needs to be. The current situation creates acute strains on the cash flows of companies and employees, putting the survival of firms and jobs at risk. Public policies must help them.
Health and fiscal policies must be front and center in this response. Monetary policy has a vital role to play in tandem. Monetary policy has to keep the financial sector liquid and ensure supportive financing conditions for all sectors in the economy. This applies equally to individuals, families, firms, banks and governments.
Any tightening in financing conditions would amplify the harm of the coronavirus shock at a time when the economy needs more support. When private spending is heavily constrained, worsening financing conditions for the public sector – which in the euro area amounts to broadly half of the economy – can be a threat to price stability.
Over the last week, we have seen conditions in the euro area deteriorate considerably. Our evaluation of the economic situation has darkened. The depth of uncertainty over the economic fallout is now visible across all asset classes, both in the euro area and globally.
This has led to a tightening in financing conditions, in particular at the longer-end of the maturity spectrum. The risk-free curve has moved up and the sovereign curves – which are key to the pricing of all assets – have increased everywhere and become more dispersed. These developments impair the smooth transmission of our monetary policy across all euro area jurisdictions and put price stability at risk.
As a result, the ECB’s Governing Council announced on Wednesday a new Pandemic Emergency Purchase Program with an envelope of 750 billion euros until the end of the year, in addition to the 120 billion euros we decided on 12 March. Together this amounts to 7.3 percent of euro area GDP. The program is temporary and designed to address the unprecedented situation our monetary union is facing. It is available to all jurisdictions and will remain in place until we assess that the coronavirus crisis phase is over.
The new instrument has three main advantages. First, it fits the type of shock we are facing: exogenous, detached from economic fundamentals and affecting all countries in the euro area. Second, it allows us to intervene in the entire yield curve, preventing financial fragmentation and distortions in credit pricing. Third, it is tailored to manage the staggered progression of the virus and the uncertainty about when and where the fallout will be worst.
This is reflected in the terms and conditions of the new program. While the benchmark allocation across jurisdictions will continue to be the capital key of the national central banks, purchases will be conducted in a flexible manner. This allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions.
Moreover, to the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face.
We are fully prepared to increase the size of our asset purchase programs and adjust their composition, by as much as necessary and for as long as needed. We will explore all options and all contingencies to support the economy through this shock.
We have also decided to purchase commercial papers of sufficient credit quality and to expand the eligible collateral in our refinancing operations. The aim is to reinforce the actions that we took last week to protect the flow of credit to companies and people.
We are making available up to almost 3 trillion euros in liquidity through our refinancing operations, including at the lowest interest rate we have ever offered, -0.75 percent. Offering funds below our deposit facility rate allows us to amplify the stimulus from negative rates and channel it directly to those who can benefit most. European banking supervisors have also freed up an estimated 120 billion euros of extra bank capital, which can support considerable lending capacity by euro area banks.
All this underlines the ECB’s commitment to play its role in supporting every citizen of the euro area through this extremely challenging time. The ECB will ensure that all sectors of the economy can benefit from supportive financing conditions that enable them to absorb this shock. We will do everything necessary within our mandate to help the euro area through this crisis, because the ECB is at the service of the European people.
Christine Lagarde is the president of the European Central Bank.