MNI POLICY: Eurozone In Two-Speed Recovery-ECB's De Guindos

By Luke Heighton

     FRANKFURT (MNI) - Europe's failure to act with greater unity to the

economic threat posed by the Covid-19 pandemic means it faces a two-speed

recovery, European Central Bank vice president Luis de Guindos said in an

interview Wednesday, with a second wave of infections now a "distinct

possibility."

     The eurozone has begun to see a recovery in activity, de Guindos told La

Stampa, with indicators pointing towards a rebound in a number of countries.

However many "unknowns and question marks remain," he said. "The most worrying

thing is that a two-speed recovery seems to be starting to emerge," with GDP

among more resilient economies that reacted better than others likely to

increase at a faster pace.

     The only way to have avoided such asymmetries, de Guindos said, would have

been to have had a single response in place at the European level - something

that was not possible due to the lack of a complete banking union, a genuine

capital union and a common budgetary instrument.

     Government loan guarantee schemes, if fully deployed, could transfer about

30% of losses from banks to the public sector, on average across euro area

countries, according to Euro system staff analysis, he said. The impact of NPLs

would therefore be reduced, even if NPLs "are set to rise."

     But, de Guindos said, although a "valid tool," any discussion of creating a

'bad bank' was at this stage "premature."

     "The priorities need to be clear. The first is to complete the banking

union with the third pillar. Reopening and concluding the debate on EDIS would

send a very strong signal. Other solutions can then be considered."

     Looking ahead, policymakers should "prepare for the worst while hoping for

the best," de Guindos said, given that a second wave is now "a distinct

possibility."

     The crisis will leave scars on Europe's economy, de Guindos said, with GDP

falling significantly, in addition to the impact on employment and standards of

living.

     "The main antidote," he insisted, "will not be monetary policy - which of

course we will conduct being mindful that we are not almighty - but reforms and

fiscal measures by governments. In our work, we will also aim to reduce the

effects on inequalities.

     In the short term, he continued, there is no alternative but to spend. "But

once the emergency is behind us, all countries with high debt levels - not just

Italy - must resume their efforts to address the problem of medium-term

sustainability and compliance with the parameters set by the EU."

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

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

[TOPICS: M$X$$$,M$$EC$]