ECB Finally Hears EU Cavalry Coming to Help Its Crisis Fight

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The European Central Bank is on the verge of finally getting proper help from politicians to fight the regions economic battles, even if it
stays alone on the front line for now.To get more news about WikiFX, you can visit wikifx news official website.

The proposal by German and French leaders for a 500 billion-euro ($546
billion) aid package to help the European Union shake off the
coronavirus pandemic is seen by analysts as a significant step toward a
stronger common fiscal policy, complementing the euros monetary
Note: Chart compares Bloomberg Economics estimates of nominal income
losses associated with lock-downs in 1H20 with discretionary support
offered by governments and the cushion provided by the automatic
stabilizers in each country

Thats something ECB President Christine Lagarde and her predecessors
have long craved. For starters, the central bank should have to step in
less often to prevent debt crises. It should also be less exposed to
legal battles that have cast a shadow over its bond-buying programs, and
it could even get help hitting its inflation goal.

“The ECB has been doing the heavy lifting of supporting the entire
euro-zone economy,” said Andrew Bosomworth, managing director and head
of portfolio management in Germany at Pacific Investment Management Co.
“Now for the first time we would have the equivalent of a fiscal

Lagarde wont get backup right away. The Franco-German plan must be
supported by all 27 EU members, and disputes over whether aid should be
grants or loans are already simmering. Even if agreed, money would only
arrive next year.

Its also well short of the full fiscal cost of the pandemic, which the
ECB puts at between 1 trillion and 1.5 trillion euros, and Bloomberg
Economics says could be 2.5 trillion euros in a worst-case scenario.

What Bloombergs Economists Say

“There is at least some willingness to meaningfully share the costs of
the crisis with those countries most badly-affected. What we do not yet
know is how broad that support is or how deep it would run if the
crisis escalated. Even so, its a step in the right direction and should
be a source of comfort for the ECB.”

-Jamie Rush, Maeva Cousin and David Powell. Read their EURO-AREA INSIGHT

Before the proposal, most economists expected the ECB to bolster its
750 billion-euro pandemic bond-buying program to soak up debt issuance,
perhaps as soon as the June 4 meeting, and theres little sign those
predictions are changing.

“The Franco-German deal is very encouraging, but even if it is agreed
without dilution, the ECB is likely to remain in ‘preventive easing’
mode,” said Banque Pictet & Cies Frederik Ducrozet. “This is no time
to claim victory.”

Yet Italian bond yields did sink on the news, and Lagarde -- who
praised the deal as a “testament to the spirit of solidarity and
responsibility” -- has reason to be optimistic. Her institution is
embroiled in financial, legal and economic battles, and the plan can
help with all three.
While the ECBs job is to ensure price stability, its pandemic emergency
program also addresses a more urgent need -- stabilizing markets. That
means buying vast quantities of Italian government bonds, whose yields
were surging because investors fear the indebted country, one of the
worst-hit by the virus, would struggle to pay for its fiscal response.

The recovery plan “might make the ECB‘s job easier because it helps to
improve market sentiment toward countries like Italy,” said Nick
Kounis, an economist at ABN Amro. “If it’s successful, the ECB will have
to worry less about dealing with fragmentation across the euro area and
focus more on conventional tasks of monetary policy like inflation.”

The EU fund would be backed by countries based on economic size, and
issue aid according to need. In effect, heavyweights like Germany would
support struggling neighbors such as Italy, though conditions are still
to be negotiated.

In an interview published after the proposal, the ECB chief encouraged
politicians to combine grants with very long-term loans -- at least 10
years and perhaps 30 years -- at low interest rates.

Posted 03 Jul 2020

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