Quarantine and other restrictions imposed by governments in Europe to slow the COVID-19 outbreak have reduced economic activities to a minimum, causing turmoil across the euro area. In Germany alone, the Association of German Banks (BdB) predicted that economic output in the country could fall by 5% in 2020.
On Thursday, the European Central Bank — the main bank for the 19 EU countries that use the euro —unveiled a huge bond-buying scheme worth €750 billion ($820 billion) named the “Pandemic Emergency Purchase Program.” But what is it and how will it help the economies of the euro area survive the pandemic?
What is the Pandemic Emergency Purchase Program?
Under the bond-buying scheme, the ECB will buy up government and corporate debt from countries across the Eurozone, including debt from Greece — the country which was excluded from previous ECB bond purchases due to its low credit rating. The newly agreed buys alone will be worth 6% of the euro area’s GDP.
The practice is known as quantitative easing (QE) and is a key crisis-fighting tool in monetary policy.
The scheme will be temporary, lasting until the bank judges the crisis to be over “but in any case not before the end of the year” the ECB governing council wrote in a statement.
The ECB may extend the scope of the program, as well as the criteria for eligible securities, “by as much as necessary and for as long as needed,” it said in the statement.
What effect does the ECB intend the program have?
By massively buying up government and corporate debt, the ECB aims to keep liquidity flowing in a bid to encourage bank lending and investment.
The bank said in the statement that the scheme will “counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus, COVID-19.”
What was the reaction?
The move appeared to encourage investors with stock markets rising slightly in response. French President Emmanuel Macron said he fully supported the measure. In a tweet he said: “It is up to us European states to be ready through budgetary interventions and greater financial solidarity within the Eurozone.”
Christine Lagarde, president of the ECB, tweeted: “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.”
kmm/stb (Reuters, AFP, dpa)
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