MNI POLICY: ECB's Panetta Warns Against Fiscal Cliff Risk

The European Central Bank will "carefully assess" exchange rate developments, Executive Board member Fabio Panetta said in a speech Tuesday, repeating a message delivered by ECB president Christine Lagarde last week, while cautioning against allowing the withdrawal of fiscal support measures following the Covid-19 pandemic's crisis phase to create "cliff effects."

The results of the ECB's pandemic response had been "remarkable," Panetta said, during a roundtable with the Greek government, including a fall of around 250 basis points in the spread between Greek and German 10-year government bonds.

However, Europe is "not out of the woods yet," he warned. "In light of the current outlook for inflation," Panetta explained, "we need to remain vigilant and carefully assess incoming information, including exchange rate developments," with the ECB ready to adjust all of its policies to bring inflation in line with its medium-term aim.

In the case of Greece, the cost of its rapid and effective response to the pandemic is "inevitably taking a toll on the Greek economy," Panetta said, while adding to existing fragilities such as the lending constraints imposed on the financial system by high levels of non-performing loans.

Eventually, he said, "the need to buffer the immediate impact of the pandemic will be replaced by the need for investment and reform to support a sustainable recovery. As the national support measures are phased out, a well-planned and coordinated approach will be necessary if we want to avoid cliff effects."

European and Greek national policies "must continue to play their crucial role in absorbing the shock, supporting the recovery and achieving sustainable growth," he added.