The president of the European Central Bank has said the region’s economy will need to be weaned off its fiscal and monetary stimulus “gradually” to avoid repeating mistakes made in previous crises when support was withdrawn too fast.
Christine Lagarde said there would be a “tricky situation” for policymakers to manage once the coronavirus pandemic ended and the economy started to recover, recommending a switch to “flexible support” instead of “closing all the taps at once”.
“Our commitment to the euro has no limits,” said Lagarde. “We will act for as long as the pandemic is causing a crisis situation in the euro area.”
Her comments in an interview by Le Journal du Dimanche newspaper came as economists expressed concerns that Europe’s slow vaccination rollout and delayed fiscal stimulus could cause its economy to fall further behind the US and China.
After shrinking a record 6.8 per cent last year, the eurozone economy is not expected to rebound to pre-pandemic levels until the middle of next year. In contrast, China has already shaken off the economic impact of Covid-19, growing 2.3 per cent last year, while the US economy is expected to reach its pre-pandemic scale by the middle of this year.
Lagarde said Europe’s “economic recovery had been delayed, but not derailed”. The ECB was still “convinced that 2021 will be a recovery year”, she said, adding: “We expect the upswing to gather pace around the middle of the year, even if the uncertainties persist.”
Erik Nielsen, chief economist at UniCredit, said in a note to clients on Sunday that he was “increasingly convinced that we are heading into another 3-5 years of European growth underperformance relative to the US”.
Analysts at Allianz warned in a recent report that Europe was facing “a five-week delay on the vaccination front that, if left uncorrected, could cost close to €90bn”. That is based on a calculation that every week of coronavirus restrictions reduces quarterly nominal gross domestic product growth by 0.4 percentage points.
Investors will be watching to see if the European Commission cuts its forecast for the eurozone economy this week, having predicted in November that it would grow 4.2 per cent this year and 3 per cent next year.
The ECB is due to publish new quarterly forecasts next month and several members of its governing council told the Financial Times they believed its outlook for growth of 3.9 per cent this year looked realistic even if the short-term recovery was delayed.
However, one council member said the big downside risk was that vaccination delays and new, more infectious strains of the virus could force governments to keep strict curbs in place for longer — “that is what…
Go to the news source: Christine Lagarde warns stimulus must be removed only ‘gradually’