MNI POLICY: ECB Will Boost PEPP As Necessary, Lane Says

By Luke Heighton

     FRANKFURT (MNI) - The ECB will increase its pandemic emergence purchasing

programme if bonds spreads widen significantly, chief economist Philip Lane

indicated Monday, as he pledged to put price stability ahead of the German

Constitutional Court's concerns over monetary financing.

     Lane declined to say whether the euro zone economy has already met the

criteria for the ECB's 'worst-case' scenario of a 12% fall in GDP growth in

2020, but he noted that, compared with March, economic activity in April had

everywhere experienced a "deep fall," with a return to pre-crisis activity

levels unlikely before 2021, "if not later."

     Here are key points from the interview with El Pais:

     - The ECB is a "goal-oriented institution," Lane explained, with PEPP's

"exact figure [...] of secondary importance." June's monetary policy meeting "is

still three weeks away," he added, "and we are in the process of analysing the

situation. If we see that financial conditions are too tight, or the pressure on

individual bond markets is not reflecting economic fundamentals, we can adjust

the size or duration of our purchases, which we can anyway allocate flexibly

over time and market segments."

     - Discussing the German Constitutional's Court's ruling against the ECB's

public sector purchase programme and its implications for PEPP, Lane stressed

that the ECB is both "independent" and "subject to the jurisdiction of the

European Court of Justice, which ruled in favour of our public sector purchase

programme." Moreover, he said, ECB is "careful to remain at a good distance"

from "monetary financing [...] and this has also been confirmed by the court

rulings."

     - "In March the pandemic and the measures to contain it had already led to

a substantial contraction of activity," Lane said. "This situation got worse

again in April, where we saw a deep fall in activity everywhere. Now the picture

is changing: some countries are beginning to loosen their lockdowns. How this

will develop in the future depends a lot on how quickly the restrictions on

economic activity can be eased, but also on how we adapt to living with the

virus. The speed at which the economy bounces back will then hinge on whether

consumers are more reluctant to consume and businesses hold back on investment.

From today's perspective, it looks in any case unlikely that economic activity

will return to its pre-crisis level before 2021, if not later."

     - Asked whether the Covid-19 crisis would deepen Europe's north-south

divide, Lane noted that not all countries had been able to implement fiscal

policies to the same degree, but that "Europe as a whole benefits when a country

like Germany responds to the crisis more emphatically because, for example, it

can boost Spanish or Irish exports. So we shouldn't necessarily see these

differences as negative: it is good news that countries with strong finances are

responding forcefully to the crisis."

     - "I think it is useful to look at this more in terms of the following

question," he continued. "What should be financed at European level and what at

national level? One of the proposals under discussion is to increase the EU's

budget and have the European Commission distribute the funds. One advantage of

this proposal is that it would not entail an increase in national public debt,

and keeping the cost of debt low will help governments tackle the pandemic and

support the recovery. Instruments like the Commission's SURE programme, the

European Stability Mechanism (ESM) or the European Investment Bank also make an

important contribution in this respect."

     - Lane said he "understood" the criticism that the initial response to the

crisis was "has been somewhat slow," and that there is "still more to be done to

deal with this unprecedented crisis. In particular, it is important to make sure

that the funding is in place to guard against downside risks and support the

recovery in all EU countries. Joint and coordinated policy action has a crucial

role to play here."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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