The corona virus has become the biggest challenge for the European Central Bank since the financial crisis. But the currency keepers have largely missed their powder. The euro countries are now in demand.
By Klaus-Rainer Jackisch, HR
The still new head of the European Central Bank (ECB) hadn’t expected that: just four months after taking office, Christine Lagarde faces the biggest challenge for the ECB since the severe global financial crisis of 2008 and 2009. Because the new corona virus could be an economic shock like triggering back then because consumption and production are declining – at a time when the old crisis was not yet digested and processed.
The head of the Kiel Institute for the World Economy, Gabriel Felbermayr, compared Corona’s economic “fall-out” with the bankruptcy of the US investment bank Lehman, which accelerated the financial crisis at the time. The corona virus is the greatest threat to the global economy and could prove to be a “Lehman moment”, according to the top economist.
Central bank missing tools
The Governing Council is only too aware of this threat. Especially since one of the employees of Corona in Frankfurt’s Eurotower himself fell ill. 100 colleagues were sent to home quarantine. The central bank had therefore already gone through a crisis mode at the beginning of the week, which should ensure the functioning of the institution. With success.
However, the Governing Council is also aware that the central bank has hardly any tools left and cannot do much more. In contrast to the US Federal Reserve and the Bank of England, which sometimes lowered their key interest rates in panic-stricken panic out of fear of the consequences of Corona, the ECB no longer has any leeway: their interest rates have been at zero percent for years.
Cheap loans as an incentive
What remains is a tightening of the penalty interest rate for banks that park their money with the ECB overnight. It is likely that this will be further reduced – to minus 0.6 percent. This should give the banks an incentive to prefer to make the money available in the form of cheap loans. But who wants these loans? Which travel agency, which restaurant, which hotel, which airline now needs loans to invest? No one will expand their business operations in this tense situation. Entrepreneurs will be happy if they can avoid bankruptcy.
What the economy needs are direct, special aid payments to keep the business going. However, the ECB is not the right contact for this. It is not their job. Governments and the EU Commission have to get this done – and they are already planning it.
Italy as a shaky candidate in the euro area
But the ECB is not off the hook. Because it has to deal with another part of the problem that could quickly turn into a new euro crisis: Because of the dramatic spread of the corona virus in Italy, which is already economically badly hit, the fear of a new crisis à la Greece is widespread on the financial markets .
Italy is the wiggle candidate of the Eurozone with 130 percent debt after Greece. The country failed to put its banking sector on a solid footing. Loans of bad credit are still on the books of Italian institutes. In addition, the balance sheets are crammed with Italian government bonds. However, their returns are rising drastically due to the corona crisis. This situation is increasingly strangling Italian banks. The former ECB President Mario Draghi had known that, which is precisely why he stuck to the ECB’s ultra-loose monetary policy.
Speculation against the euro possible
But if the first banks in Italy collapse and yields on government bonds continue to rise, speculation against the euro could resume on the financial markets. Just like in the financial crisis, when the single currency was on the verge of collapse in July 2012 and Draghi spoke his famous words: “The ECB will do everything to save the euro. And believe me: it will be enough.” It was enough.
But what must the ECB do now to ward off a similarly fundamental crisis? You will have no choice but to further expand the reactivated bond purchase program. Possibly also through the controversial purchase of shares. It will again have to provide aid to banks so that they do not run into liquidity constraints.
It remains to be seen whether this will keep the financial markets at bay. Because speculators are never satisfied: they want more and more and bigger. Otherwise, it is lucrative for them to speculate against the euro and thus the currency union. This would be the worst-case scenario – in a situation in which the United States is overwhelming the world with a trade war and in which the corona virus is interrupting trade flows and is challenging globalization.
Coordination of the institutions necessary
Concerted action by the ECB, the EU Commission and national governments is now needed to strengthen the European economy. The first measures are already in place, as EU Commission President Ursula von der Leyen and Chancellor Angela Merkel had already announced.
The ECB cannot play the fire brigade alone this time, as was the case in the financial crisis – when national governments shifted their responsibility to the monetary authorities. Firstly, because the ECB has already fired most of its arrows in the quiver. On the other hand, since measures by the ECB can calm down and are therefore symbolically important – they only reach those affected indirectly or not at all. Or as a stock exchange trader put it: the ECB can smear ointment on the wound, but not more.