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Coronavirus 20 Mar 2020

A coordinated response in Europe to the COVID-19 crisis

The spread of coronavirus to several countries has led to a very charged reaction in the markets. The World Health Organization’s declaration of a global COVID-19 pandemic led to a number of immediate actions from the central banks and, concretely, the European Central Bank (ECB), as well as governments and other authorities in Europe. In a note, BBVA Research indicates that “the adoption of these measures is positive.” However, it feels that the monetary policy measures should be accompanied by a coordinated fiscal response from the European Union, which has already begun to materialize in Europe with similar stimulus plans between different countries.

The ECB has announced a voluminous and flexible 750 billion euro public and private debt purchase program, with which the monetary authority decisively complements the initial set of measures previously announced by Christine Lagarde. This new package of measures, apart from representing a significant amount, gives the ECB flexibility to tackle tensions in the markets and, more importantly, it sends a strong signal of support to the Euro zone countries.

The BBVA Research report signed by Sonsoles Castillo and Miguel Jiménez explains that the ECB has stepped up its monetary efforts on two fronts. On the one hand, “The first important measure was ensuring liquidity for financial institutions in favorable conditions so that the economy flows, both for families and for companies.” With this goal in mind, it improved the conditions so that “banks can request more liquidity in the TLTRO-III program, at a lower cost and with eased conditions.”

On the other hand, “The second measure was to substantially increase the current asset purchase program (QE), with €120 billion this year, in addition to the existing €20 billion of purchases per month.

The adoption of these measures is positive because it attacks the main problem in situations of sharp declines in demand and panic in the financial system

“The adoption of these measures is positive because it attacks the main problem in situations of sharp declines in demand and panic in the financial system,” Sonsoles Castillo and Miguel Jiménez said. However, they should be accompanied by “other measures from supervisors and governments,” that make it possible to “directly address the appearance of any financing problem in the economy, especially in sectors that will be impacted the most by the spread of coronavirus.” 

BBVA Research recalls in its analysis that: “Unlike the U.S., the banking system is the main financing vehicle in the real economy.” For this reason, it believes it is “absolutely critical” to safeguard this channel. Therefore, Sonsoles Castillo and Miguel Jiménez consider the ECB’s “inaction on interest rates positive”. They also stress the fact that at her press conference, Christine Lagarde emphasized “the call for fiscal policy measures in a decisive and coordinated manner in order to complement monetary policy measures,” following similar warnings from Mario Draghi. BBVA Research agrees that: “Europe should respond with a single and decisive fiscal tone.” “It’s time for European governments to act in coordination. If this does not occur, Europe will once again show that it does not respond effectively to crises,” they conclude.

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