The watchword of the moment is to avoid a premature withdrawal of economic support measures that must continue to provide support, along with monetary policy, well beyond the end of the pandemic. But in the medium term, governments will have to prepare credible fiscal consolidation plans. This is what the vice president of the ECB, Luis de Guindos, said in the press conference presenting the Financial Stability Review: “In this phase, fiscal policy was together with monetary policy the first line of defense against the pandemic and had to carry out a primary role in supporting the economy and mitigating the impact of the pandemic on businesses and households, also taking advantage of very favorable financing conditions. Looking ahead, once the pandemic is over, it will be necessary to think about a process of returning the debt / GDP ratio “.
De Guindos stressed that this process does not fall within the competence of the ECB but falls within the competence of the European Commission which intends to maintain support for the economy until the output gap with respect to 2019 has been recovered.
Meanwhile, the ECB has no plans to “terminate long-term purchase programs. Inflation – continued the former vice president of Victor Constancio – will continue to remain below the ECB’s target and monetary policy will continue to expand. And there are many other programs besides Pepp. One will be concluded, but there will be others ». As a result, the stock of bonds will not decline until the end of 2023.
Costancio then reserved words to honey for Mario Draghi: “With his speech, Italy will have a very well oriented fiscal policy for recovery” and the EU Next Generation fund will be able to “sustain greater growth until 2026”.
What worries the ECB is rather the recent increase in reference rates in the US which has “rekindled fears of a potential change in the direction of financial conditions” and which is associated with the continuous rallies in many financial markets and the rise in real estate values with related fears of a sudden correction. Also because the risks to financial stability, in the phase of exiting the third pandemic wave, “remain high” and could concentrate on some countries where companies are more indebted. Furthermore, the financial markets “showed considerable exuberance” with the stock exchanges rallying despite the rise in US yields and the decline in the global bond market. A trend that contrasts with “weaker economic fundamentals” and in which recent episodes of volatility highlight “the risk of repricing”.