“The enemy of conventional wisdom is not ideas, but the march of events,” European Central Bank (E.C.B.) President Christine Lagarde said at the E.C.B. Zoom conference November 11th. Lagarde was quoting the late John Kenneth Galbraith, whose life was marked by two World Wars and countless economic crises. Nowadays, events march straight into the abyss of a service-led recession, dragging 5 million jobless people along with them – calculated only in the euro area.
But although COVID-19 is an exogenous shock, the wave of unemployment overturns socio-economic groups at the bottom of the income scale more than others. Acknowledging that this pandemic is an unprecedented kind of waterloo is vital, to build up resilience and a new strategy to avoid “scarring” in the labour market.
Today, the risk is to declare defeat when 3.2 million workers are too “discouraged” to fly blindly after jobs which turn, little by little, to dust. Indeed, this is certainly not the E.C.B.’s board-approved risk appetite. The E.C.B. relies on certain fine-grained policy-making and is determined not to lie idle in front of the alarming spectacle of the economy.
In her statements at the conference, President Lagarde underlined that recovery “may not be linear, but rather unsteady, stop-start and contingent on the pace of vaccine roll-out.” This instability may percolate a dangerous feedback loop between the real economy and the financial sector if people stop considering the pandemic to be uniquely dangerous. Indeed, if households choose to precautionarily save money at this point, remaining open would be unsound business sense for many firms. These firms would undoubtedly close their doors, triggering a “firm exit multiplier,” as complementary businesses would see the demand for their services slump and global output would be reduced. Financially, Lagarde said, “banks might start tightening credit standards in the belief that corporate creditworthiness is deteriorating, leading to firms becoming less willing or able to borrow funds, credit growth slowing, and banks’ risk perceptions rising further.”
Economic tools to counter the shock combine re-calibrated Targeted Longer-Term Refinancing Operations (T.L.T.R.O.s), which broaden eligible collateral, and the launch of a €1.35 trillion pandemic emergency purchase program (P.E.P.P.). The current monetary policy the E.C.B. has concocted follows this trend. Its goal is to minimise any “crowding-out” effects which might engender negative spillovers for all economic sectors, and to provide certainty in credit abundance to prevent excessive deleveraging. This fiscal policy could potentially break the “paradox of thrift,” using private, targeted subsidies to compensate for the considerable loss of disposable income within households.
This would raise confidence for firms, clients, and consumers, and enliven monetary transmission on the medium-run, confirmed the E.C.B.’s Consumer Expectations Survey.
The stars are aligned for public and private sectors to follow E.C.B. guidance and take the steps toward a better future. “The GDP-weighted sovereign yield curve is in negative territory up to the ten-year maturity,” Lagarde announces. “Nearly all euro area countries have negative yields up to the five-year maturity. Bank lending rates are close to their historic lows: around 1.5% for corporates and 1.4% for mortgages.” See how peace for economists is nothing abracadabrantesque?
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