Frankfurt (AFP)

The European Central Bank (ECB) should strengthen its arsenal of support for the economy on Thursday, well beyond the emergency measures drawn in March, as the impact of the new coronavirus promises to be felt for several more years.

According to many analysts, the PEPP program to limit the effects of the pandemic, initially endowed with 750 billion euros to buy public and private bonds, should be inflated by 500 billion euros.

This unprecedented bazooka, which had already committed 235 billion euros at the end of May, should be extended "until September 2021", according to Frederik Ducrozet, strategist at Pictet Wealth Management.

"Rarely have the arguments for strengthening the monetary stimulus from the ECB been as strong," said Holger Schmieding, economist at Berenberg.

To decide, the guardians of the euro will have a new set of macroeconomic forecasts running until 2022, a crucial assessment of the magnitude and duration of the crisis.

The ECB president Christine Lagarde is already counting on a decline in gross domestic product in the euro zone of between 8 and 12% this year, before a recovery with uncertain contours.

Additional difficulty: if the containment measures led to a "very symmetrical" economic shock, which hit all countries around mid-March, the rebound promises to be "much more asymmetrical", observes Carsten Brzeski, of ING bank .

- "Rotten" bonds -

According to the virulence of the epidemic, the sectors affected and the safety nets deployed to protect employment, "many peripheral economies risk a more lasting recession," he added.

Inflation fell to 0.1% in May and could show zero over the year before timidly rising to 0.7% in 2021, according to Capital Economics, very far from the objective "close to 2%" behind which the ECB has been running since 2013.

Faced with this gloomy picture, the ECB should not touch its rates, and will confirm in particular the negative rate of 0.50% hitting the liquidity of banks which are not distributed in the economy.

But the ceiling for deposits exempt from the negative rate could be raised, as excess liquidity increases in response to the support measures, said Mr. Ducrozet.

The institution could, however, include in the scope of its redemptions corporate bonds whose financial rating has switched to "rotten" territory, becoming what the market calls "fallen angels".

It could also announce its desire to reinvest the securities participating in the PEPP when they mature, in order to better manage this stock of assets over the long term, as it already does for its "QE" program of asset buy-backs implemented 2015.

- Legal threat -

As the eurozone states are going into debt exponentially, not to mention a possible future European loan, the ECB will also discuss the "distribution key" of sovereign debt buybacks, planned to reflect the share of each Member State in its capital, says Fritzi Köhler-Geib, chief economist at KfW.

Deviations from this rule have been observed in the context of the PEPP, but "for the most part negligible and less important than expected for Italy", a country hit hard by the health crisis, notes Chiara Cremonesi, strategist at UniCredit.

But opening this site as technical as political involves a major risk: in a resounding judgment in early May, the German Constitutional Court ordered the ECB to justify by August its debt buyouts, while making "distribution keys" a condition of their validity.

Certainly, Mrs. Lagarde should repeat Thursday that the ECB is only subject to the Court of Justice of the European Union, which has dubbed its bond buybacks.

But this legal threat could rekindle fears of a breakup of the euro zone, especially "if the economic gap widens again" between member countries and the ECB is restrained in its action, warns Carsten Brzeski.

© 2020 AFP