The ECB's response to the emergence of the coronavirus

• Economy.The ECB comes out in defense of the Eurozone with a 750,000 million emergency plan against the coronavirus

The coronavirus pandemic is a collective public health emergency unprecedented in recent history. It is an unbearable human tragedy that takes place around the world and we appreciate the dedication of those who work on the front lines of our health systems. It also represents an extreme economic shock that requires an ambitious, coordinated and urgent policy response on all fronts to support at-risk households and businesses.

Unlike 2008 and 2009, the shock we face is universal : it is common to all countries and to all segments of society. Everyone has to reduce their daily activities and, therefore, their spending, while the containment measures last. Basically, over a period of time, a large part of the economy freezes.

As a result, economic activity will drop significantly across the euro area . Public policies cannot avoid it. What they can do is ensure that it is not longer lasting and deeper than necessary. The current situation creates acute tensions in the cash flows of companies and employees, putting the survival of companies and jobs at risk. Public policies must help them.

Health and fiscal policies must play a central and priority role in this response. Monetary policy has a vital complementary role. It has to maintain liquidity in the financial sector and ensure favorable financing conditions for all sectors of the economy. This applies equally to families, companies, credit institutions and governments.

Any strain on financial conditions would increase the damage created by the coronavirus shock at a time when the economy needs more support. When private spending is significantly restricted, worsening financing conditions for the public sector - which in the euro zone accounts for almost half of the economy - can be a threat to price stability.

Over the past week, we have seen a considerable deterioration in the situation in the euro area . Our assessment of the economic situation has been clouded. The magnitude of uncertainty about the downturn in the economy is now visible across all asset classes, both in the euro area and in the rest of the world.

This has resulted in a tightening of financial conditions, in particular in longer maturities. The risk-free interest rate curve has shifted upward, and sovereign curves, which are key to the pricing of all assets, have increased worldwide and are more dispersed. This evolution hinders the smooth transmission of our monetary policy to all the countries of the euro zone and puts price stability at risk.

Consequently, the Governing Council of the ECB announced on Wednesday a new Emergency Procurement Program against the pandemic for an amount of 750,000 million euros until the end of the year, in addition to the 120,000 million euros agreed on 12 March. Together, this represents 7.3% of the GDP of the Euro zone . The program is temporary and designed to cope with the unprecedented situation facing our monetary union. It is available to all jurisdictions and will continue to operate until we estimate that the coronavirus crisis phase has ended.

The new instrument has three main advantages. Firstly, it adjusts to the type of shock we are facing: exogenous, not related to the fundamental factors of the economy and which affects all countries in the euro area. Second, it allows us to intervene in the entire yield curve, avoiding financial fragmentation and distortions in credit prices. Third, its size is adequate to manage the staggered progression of the virus and uncertainty about when and where it will have the worst consequences.

This is reflected in the conditions of the new program. Although allocation between different jurisdictions will continue to be made using the capital key of national central banks, purchases will be carried out with flexibility. This will allow for fluctuations in the distribution of acquisition flows over time between different asset classes and between jurisdictions.

In addition, insofar as some of the self-imposed limits could hinder the actions that the ECB must carry out to fulfill its mandate, the Governing Council will consider reviewing them, as necessary, in order that their actions result proportionate to the risks we face . We are fully prepared to increase the size of our asset purchase program and adjust its composition, as required and for the time necessary. We will study all options and contingencies to support the economy during this shock .

We have also decided to buy commercial paper of sufficient credit quality and to extend the admissible guarantees for financing operations. The objective is to reinforce the measures we adopted last week to protect the flow of credit to companies and citizens.

We have offered almost € 3 trillion in liquidity through our financing operations, including the -0.75% interest rate, the lowest we have ever offered. Offering funds below our deposit interest rate allows us to increase the stimulus of negative rates and channel it directly to those who can benefit the most. European banking supervisors have also freed some € 120 billion of additional bank capital, which can greatly support the lending capacity of euro area credit institutions.

All of the above underscores the ECB's commitment to play its role by supporting all citizens of the euro area at this extremely difficult time. The ECB will ensure that all sectors of the economy can benefit from favorable financing conditions that allow them to absorb this shock .

We will do everything necessary within our mandate to help the euro area during this crisis, because the ECB is at the service of European citizens.

Christine Lagarde is the President of the European Central Bank (ECB)

According to the criteria of The Trust Project

• European central bank
• Coronavirus
• Covid 19

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