The ECB kept everything unchanged at its July meeting, as European leaders attempt to hammer out a deal on a joint recovery fund for the region, which is attempting to dig its way out of a deep economic hole in the wake of the pandemic.
“July must be the month of decisions”, Spanish Prime Minister Pedro Sanchez insisted earlier this week, ahead of negotiations set for Friday in Brussels. Italy’s Giuseppe Conte struck a similarly urgent tone. “It’s crucial that a decision will be made by the EU Council in July”, he told Italian lawmakers.
At stake is the €750 billion rescue package proposed by Germany and France to much fanfare in May. The plan was billed by some observers as “perhaps the largest political shift on the continent in 30 years”, when it was announced.
Read more on the recovery fund: What’s Next After Europe’s ‘Essential Day’
As a reminder, the recovery fund would represent a giant stride down the road to fiscal burden-sharing and jointly-guaranteed debt. When seen in conjunction with a variety of domestic initiatives aimed at shoring up the bloc’s largest economy, Germany’s role in spearheading the plan marks an epochal shift for the notoriously frugal nation, which has embraced the need for fiscal spending given the exigent circumstances.
Part of the plan entails grants, with the largest sums going to Italy and Spain, according to the original draft, which included a hodgepodge of programs and facilities aimed at bolstering confidence.
Standing in the way are the so-called “Frugal Four” states who will need to be convinced in order for a deal to get done. Most believe this is a foregone conclusion, though.
One person who certainly hopes that leaders can agree in short order is Christine Lagarde, whose first year on the job after taking the reins from Mario Draghi has been a harrowing experience, to say the least.
In addition to topping up “regular” QE in March, Lagarde introduced the world to the Pandemic Purchase Program (PEPP), a more flexible asset-buying facility with initial firepower of €750 billion, which was later raised to €1.35 trillion.
The size of the program was kept unchanged, as expected, at Thursday’s meeting, and the ECB reiterated that it will continue to make purchases in a flexible manner for at least another year.
As a reminder, the ECB has moved beyond the capital key with PEPP, and that’s apparently causing some internal consternation. Deviations from the capital key were material during the first two months of the facility’s operation, which is a euphemistic way of saying Lagarde went from asserting that the ECB isn’t in the business of tamping down spreads in the periphery to launching a program aimed at doing just that.
PEPP’s “flexibility” is arguably its most powerful feature as it allows the ECB to ensure that vulnerable locales (i.e., Italy) don’t lose market access as they struggle to recover from the pandemic.
This has benefited markets, and Lagarde has been keen to press for help from fiscal policy. The €750 billion rescue fund represents a potential godsend in that regard. You can expect her to emphasize as much in her remarks at the press conference Thursday.
As for rates, the ECB said they’ll “remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics”. That’s probably going to take quite a while.
Although the ECB will continue to insist that it can (and will) do more if necessary, the Friday-Saturday summit in Brussels is all that matters for Europe economically right now.
Again, some manner of deal is seen as a foregone conclusion. But nothing should be taken for granted when it comes to proposals for fiscal unity in Europe, something ECB policymakers know all too well.