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The president of the European Central Bank 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off its fiscal and monetary stimulus “gradually” to avoid repeating mistakes made in previous crises when support was withdrawn too quickly.
Christine Lagarde said there would be a “sticky situation” for policymakers to deal with once the coronavirus pandemic has ended and the economy has started to recover, recommending a shift to “flexible support” for the instead of “turning off all the taps at once”.
“Our commitment to the euro has no limits,” said Lagarde. “We will act as long as the pandemic causes a crisis situation in the euro area.”
His comments in an interview with Le Journal du Dimanche came as economists feared that the slow rollout of vaccination in Europe and the delay in fiscal stimulus could lead its economy to fall further behind the United States and the United States. China.
After shrinking from a record 6.8 percent 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 the economic impact of Covid-19, growing 2.3% last year, while the US economy is expected to reach its pre-pandemic scale by the middle of this year.
Lagarde said that “Europe’s economic recovery has been delayed, but not derailed”. The ECB was still “confident that 2021 will be a year of recovery,” she said, adding: “We expect the recovery to pick up speed around the middle of the year, although 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 for another 3 to 5 years of underperforming European growth relative to the United States. United”.
Allianz analysts warned in a recent report that Europe faces “a five-week delay on the vaccination front which, if left unchecked, could cost nearly € 90 billion “. This 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, after predicting in November that it would rise 4.2% this year and 3% next year.
The ECB is due to release new quarterly forecasts next month and several members of its governing council told the Financial Times that they believe its outlook for 3.9% growth this year looks realistic even if the near-term recovery is delayed.
However, a board member said the big downside risk was that delays in vaccination and new, more infectious strains of the virus could force governments to maintain strict brakes for longer – “that’s what really matters. recovery”. Lagarde alluded to these concerns when she said, “We are not immune to unknown risks that arise.”
She urged the EU to “speed up” the process of ratifying national spending plans for the € 750 billion stimulus fund intended to support the countries hardest hit by the pandemic. “You fight fire with fire,” she said. “It’s best to act quickly, although you may have to go back to correct things that may have gone wrong.”
Investors were encouraged by news last week that Mario Draghi, the former ECB president, had accepted an invitation to become Italian prime minister. Lagarde said she had “full confidence” in Draghi’s ability to “restart the Italian economy”.
Last week, a group of more than 100 economists, including Thomas Piketty, signed a letter published by several newspapers calling on the ECB to cancel or convert the nearly 2.5 billion euros of public debt it holds. in perpetual bonds in exchange for increased government investment.
But Lagarde dismissed the idea as “inconceivable”, echoing his previous position saying: “It would be a violation of the EU treaty which strictly prohibits monetary financing. This rule is a fundamental pillar of the common framework that underpins the euro. “
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