With its PEPP operation to massively repurchase mainly public securities triggered at the start of the Covid-19 pandemic, the European Central Bank (ECB) is preserving financial stability and maintaining inexpensive financing conditions, its President, Christine Lagarde, reaffirmed on Thursday 19 November.
“ECB has delivered. We’re in the second wave and we’ll continue to deliver”, stressed Mrs Lagarde during a debate in the European Parliament’s Committee on Economic and Monetary Affairs. She recalled that the Governing Council of the Frankfurt Institute had decided at the end of October that the available instruments would be recalibrated at its December meeting (see EUROPE 12592/3).
While Markus Ferber (EPP, Germany) questioned the very legality of the PEPP operation, the ECB President once again had to justify it. This operation is “targeted, temporary and exceptional” and, in the face of a macroeconomic shock of such magnitude, the inherent flexibility of the operation allowed the purchases to be modulated according to the nature of the assets, timing and jurisdictions.
This flexibility was very useful in March, when the pandemic broke out. Flexibility is “less indispensable” now, she noted.
On behalf of the Renew Europe group, Spain’s Luis Garicano noted that Olivier Blanchard, the former IMF chief economist when Mrs Lagarde was Head of the international financial organisation, advocates helping a euro area country in difficulty through the use of the European Stability Mechanism (ESM), the euro area’s permanent rescue fund, combined with the possibility of a sovereign buyback by the ECB (via the OMT operation). In this way, it is possible to set fiscal and economic policy conditions, Mr Garicano said, unlike the PEPP operation, which is equivalent to “all carrots and no sticks”.
Mrs Lagarde recalled that the pandemic is an exogenous shock affecting all euro area countries, whereas an ESM rescue plan is put in place when a country is no longer able to refinance its public debt on its own, as was the case for Greece, Ireland and Portugal.
Monetary policy and fiscal policy go hand in hand
In her introductory speech, the former Head of the IMF expressed the wish that euro area countries, by using fiscal leverage and stimulating public investment, would strengthen the ECB’s action. They should also steer the recovery of their economies to promote the ecological and digital transition and boost competitiveness, she added.
In response to a question by Jonás Fernández (S&D, Spain), she hoped that the EU-27 will be able to adopt the Next Generation EU Recovery Plan as soon as possible, while Hungary and Poland, supported to some extent by Slovenia, are blocking agreement on the post-2020 EU budget (see separate news item).
The issue of the public debt accumulated during the pandemic should not be overlooked, as it will remain once the pandemic has been overcome. A “sequencing”should be developed now to allow the continuation of the current budgetary support without losing sight of the sustainability of public debt in the medium term, Mrs Lagarde said.
Finally, Marco Zanni (Identity and Democracy, Italy) spoke about the possible cancellation of sovereign debt of euro area countries held by the ECB, a possibility also mentioned by Parliament President David Sassoli. Mrs Lagarde cut off all speculation: “Any action of this nature would constitute an infringement of the European Treaty. I respect the Treaty!” (Original version in French by Mathieu Bion)