ECB: The Roof of Europe
While the ECB did not make any changes in interest rates in line with market expectations on 23 January 2020, it announced that the strategic review started. The content of the strategic review consisted of “price stability,” “monetary policy toolkit,” “economic and monetary analyses” and “quantitative formulation of communication practices” (European Central Bank 2020a-i).
The first serious warning of the bank within the scope of COVID-19 was made by ECB President Christine Lagarde on 5 February. Stating that the coronavirus outbreak contributed to global economic uncertainty, Lagarde did not give a clue about the monetary policy to be adopted against this new risk. Lagarde repeated the same warning a day after this announcement (Hurriyet, 2020). On 3 March, ECB President Lagarde stated that they were ready to take “appropriate and targeted measures” to combat the negative impact of the COVID-19 outbreak on the economy (Financial Times 2020a, b).
When the calendars showed 4 March, the Finance Ministers of the Euro Group member countries stated that they were ready to use all policy tools that included financial measures to support economic growth in the face of the risks posed by the coronavirus.
In March, when the effects of the outbreak were seen seriously and around the middle of March when the economies closed one by one, the ECB took its first serious step. The bank announced, on 12 March, that it planned to purchase additional temporary assets of 120 billion euros by the end of the year, although the interest rates remained unchanged (European Central Bank 2020a-i).
In the statement made regarding the decision, it was stated that temporary new long-term refinancing operations (LTRO) would be provided to support the ECB’s Euro Zone financial system, which would provide bank loan support for SMEs affected by the spread of the coronavirus.
In her post-decision statement, ECB President Lagarde stated that the spread of the COVID-19 outbreak had a negative impact on the growth of the Eurozone, that the risks were downside for the region, and that an assertive and coordinated fiscal policy response would be needed, and if interest rate cut was needed, they would do it (Anadolu Ajansi 2020a-g).On 16 March, the ECB decided to expand the swap line with the Fed and BoJ, apart from the central banks of Canada, UK and Switzerland, to secure dollar liquidity on a global scale (European Central Bank 2020a-i).
On 18 March, the ECB issued a new statement, announcing that the economic consequences of the spread of the coronavirus outbreak were closely monitored and they were ready to adjust all measures taken against the epidemic, when deemed appropriate. On the other hand, on 20 March, the bank decided to re-activate the swap line with the Danish Central Bank to expand its access rights from 12 billion euros to 24 billion euros. Thus, the bank supported the provision of euro liquidity with its successive swap moves (European Central Bank 2020a-i).
On 20 March, the European Central Bank announced that Eurozone banks struggling with the economic impact of COVID-19 would be given more flexibility in audits. With this measure, it was aimed to make it easier for banks to provide funds to individuals and companies in difficult times. Meanwhile, the leaders of 9 European Union (EU) countries, including France, Italy, Spain, Greece, Belgium, Ireland, Portugal, Slovenia and Luxembourg, called for the establishment of a joint borrowing instrument to finance the policies implemented against the pandemic. However, on 27 March, it was reported that leaders could not agree on a common policy against the economic effects of COVID-19. On the same day, the ECB advised, due to the novel coronavirus (COVID-19) outbreak, banks in the Eurozone not to pay dividends, not to buy back shares until October and to use their profits to support the economy against the impact of the pandemic.
(Anadolu Ajansi 2020a-g).In April, the ECB postponed the strategic review it announced in January, which aimed to redefine the tools to achieve the bank’s main goal, for 6 months due to the pandemic. The completion of the strategic review was postponed from the end of 2020 to mid-2021 (European Central Bank 2020a-i). The bank announced on April 15 that it freed up more than 20 billion euros in banks in the Eurozone (European Central Bank 2020a-i).
On April 30, the ECB announced that it facilitated the conditions of Targeted Longer-Term Refinancing Transactions (TLTRO), while keeping interest rates unchanged in line with market expectations. In this context, interest rates in TLTRO were reduced by 50 basis points from the average interest of Eurosystem’s refinancing transactions from June 2020 to July 2021 (European Central Bank 2020a-i).
Following the decisions, ECB President Lagarde said that the pandemic caused an unprecedented decline in the Eurozone economy, and that it was difficult to predict the time of recovery. In May, the professional forecasters survey of the ECB for the second quarter had a result similar to Lagarde’s statements and it was concluded that the recovery in the economy would be slow and gradual (Anadolu Ajansi 2020a-g).
In the written statement made on 5 May, it was emphasized that the bank was determined to do everything to bring inflation back to the targeted level, while the update report published on 14 May stated that an unprecedented contraction in the Eurozone economy was expected in the second quarter due to the pandemic (European Central Bank 2020a-i). The ECB, which could not achieve the desired recovery in the economy after the 2008 global financial crisis due to the Brexit deadlock, political developments and geopolitical risks, reached even more stalemate with the pandemic. With the reflection of this situation on the expectations and clear expression of it, the ECB’s monetary policy minutes published in mid-May signaled that the Pandemic Emergency Asset Purchase Program could be expanded.
Lagarde shared the forecast on 27 May that the Eurozone economy would shrink between 8 and 12% in 2020 (Reuters 2020). By 4 June, the expected step was taken and the ECB increased Pandemic Emergency Asset Procurement Program by ˆ600 billion and took it up to ˆ1 trillion 350 billion (European Central Bank 2020a-i).
Before the end of first week of June, ECB President Lagarde took the stage once again and, verbally, emphasized that the ECB’s crisis-related measures were temporary, purposeful and proportionate. Finally, the bank launched the Eurosystem repo facility for central banks (EUREP) on 25 June to meet the euro liquidity needs of central banks outside the Eurozone (Bloomberg HT 2020).
The ECB announced that it had launched a new repo program to provide euro liquidity to central banks outside the Eurozone. With the program that will last until the end of June 2021, the ECB aimed to meet the liquidity needs of central banks outside the Euro Zone.
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