COVID-19 update: Euro area policy response
- The flexibility and proactivity of the European Central Bank (ECB) since the beginning of the COVID-19 crisis has been a positive surprise. Generous liquidity measures, easier collateral requirements, increases in asset purchases programmes and the creation of the Pandemic Emergency Purchase Programme, have helped the ECB maintain smooth credit flow to the private sector, stabilise markets and reduce fragmentation risks.
- The Next Generation EU package is also a genuine step forward. Joint debt issuance, fiscal transfers and proposed joint tax revenues are politically meaningful. But the package is too small (around 5% of EU GDP) and slow (peaking in 2023-2024) to be a proper cyclical-stabilisation tool.
- In the meantime, governments will remain on the hook. Fiscal responses should move from damage control to demand stimulus. Here Germany is leading the way, but other governments remain in ‘backstop’ mode.
- Overall, we expect fiscal stimulus of around 4% for the Eurozone this year, far from the 9% needed to offset the COVID-19 induced permanent income loss.
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