Weak. Clumsy. Behind the curve. The European Central Bank took stick for its initial response to the Covid-19 pandemic – and rightly so.
Those accusations can no longer be levied after the ECB used an emergency meeting to launch a gigantic new package of quantitative easing (QE) – the electronic money creation device that has become a key tool for central banks since the financial crisis of 2008.
Make no mistake, the additional €750bn (£700bn) of QE is not a magic bullet. The ECB has said it is prepared to go further and will need to. Individual governments need to do more – much more – as well. Even then, it is a question of mitigating what is already shaping up to be the recession to end all recessions.
That said, the action is welcome. A week after the ECB president, Christine Lagarde, foolishly said it was not the job of her central bank to narrow spreads – the difference in interest rates between the stronger and weaker members of the eurozone – the ECB has done an inevitable U-turn.
Almost as soon as Lagarde made her comment the spread between German and Italian bonds sharply widened and the trend has continued for the past week. That was not entirely surprising given that Italy has the weakest growth record in the eurozone, very high public debt and is the European country worst affected by Covid-19.
The ECB has responded with a package that is not just big but well crafted to allow the central bank to focus on the countries that look the most vulnerable to a bond market sell-off – Italy and Greece. In addition, although the purchases of assets should average just over €100bn a month until the end of the year, there is scope to front-load them so that support is provided now, when it is most acutely needed.
Why is the ECB doing this? One reason, most obviously, is that it needed to catch up with other central banks, such as the Fed and the Bank of England, which have moved more decisively.
But it has also become obvious in the past week that the eurozone – and Europe more widely – is going to suffer grievous economic damage as a result of Covid-19. An early sign of what is to come was provided by the biggest slump in German business confidence on record. When the official data comes out for those countries in lockdown – Spain, Italy and France among them – they are going to make for horrific reading.
There are clearly concerns at the ECB about whether the eurozone itself will survive this crisis without a massive support package. Lagarde’s insistence that “there are no limits to our commitment to the euro” is evidence of that.
The situation is immensely more dangerous – both economically and politically – than it was when spiralling Italian and Spanish bond yields prompted Mario Draghi’s “whatever it takes speech” in 2012. With people dying in their thousands, borders closing and activity collapsing, the entire European project is at risk.