Before the Coronapocalypse, the European economy was an anemic patient, white in the face and without any energy to mirror America’s monumental growth. Fast forward to the pandemic, and Europe is on life support. The smartest men and women in the room believe they have the panacea to rescue the eurozone: doing what it did last year, but just more of it. What is the it exactly? Why, money-printing, you non-central-banker! Is this not the definition of insanity? Why, yes, it is, my dear Watson. But you could never tell the fine folks at the institution. They would never believe you.
A PEPP in Your Step
The European Central Bank (ECB) recently announced that it would expand its Pandemic Emergency Purchase Program (PEPP) by $600 billion to $1.52 trillion. This is a monetary initiative comparable to the quantitative easing efforts by the Federal Reserve, the Bank of England (BoE), the Bank of Japan (BoJ), and other central banks around the world. ECB chief Christine Lagarde believes this time it will be successful because of an even more aggressive bond-buying putsch.
In other changes, PEPP will be extended until June 2021 or whenever the bank deems the financial crisis has been contained. Maturing payment from all the assets it purchased under PEPP will be reinvested until the end of 2022, at the very least. The central bank kept interest rates unchanged, with the primary refinancing rate at 0%, the marginal lending facility at 0.25%, and the deposit rate at -0.5%.
This is all in addition to the ECB’s current mechanism of acquiring around $23 billion in government bonds to allow countries to tackle the COVID-19 economic fallout on the fiscal side.
Lagarde said in a statement to the press:
“Together with the substantial monetary policy stimulus already in place, today’s decisions will support liquidity and funding conditions in the economy, help to sustain the flow of credit to households and firms, and contribute to maintaining favorable financing conditions for all sectors and jurisdictions, in order to underpin the recovery of the economy from the coronavirus fallout.”
The ECB’s decision comes soon after the experts projected the eurozone economy could contract by as much as 15% in the second quarter. If the regional market continues to worsen, you can expect the ECB will expand its mandate and employ some other Keynesian interventionist tool by clutching its pearls over bogus deflation data. Policymakers have aired their concerns about the overall economic performance in the second and third quarters of this year, despite business and manufacturing activity rebounding from all-time lows last month.
But the ECB will be incredibly busy in the coming months since it will probably play an integral part in the European Commission’s plan to spend $826.5 billion to rescue and stimulate the trade bloc. Commission President Ursula von der Leyen recently unveiled a public-works scheme with an $826.5 billion price-tag that would be divided into grants and loans to member nations.
A Lost Cause
The mantra for central banks everywhere is to do whatever it takes to shore up the economy.
But while it is a lofty and expensive objective, this has been the motto for the ECB since the Great Recession. The ECB has taken it one step further: Do whatever it takes until there is a currency crisis. Frankfurt has been trying everything to achieve even a modicum of growth. Over the last decade, there have been moments of ebullience in the eurozone, but it has mostly been a time of decay in the doldrums of despair. The U.K. and Germany breathed life into the carcass, but now that Brexit has happened, Europe is a rotting corpse – and Berlin cannot keep bailing out its neighbors forever.
From Italy to Greece to France, the eurozone is in a perpetual fiscal calamity, economic collapse, and sovereign debt crisis. The area is still trying to pay for all the red ink it spilled following the 2008 recession. Now that COVID-19 has wreaked havoc in the global economy, Europe has been throwing everything but the kitchen sink at the Coronavirus. Like other markets right now, the trade bloc will show proof of life amid optimism on reopening and the highly infectious respiratory illness subsiding.
Before he exited stage left, former ECB President Mario Draghi conceded that the economy was getting “worse and worse.” His remedy was recommending a more woke form of monetary policy, which his successor, Christine Lagarde, has already taken into consideration. She was planning to integrate wokeness into money-printing, but the Wuhan Coronavirus delayed her progressive mechanisms.
Europe is beginning to return to normal, but its normalcy should not elicit too much excitement. It is not what you would think. Normalcy in Europe is more of the same but without the lockdowns and restrictions. At its worst, the continent is Edvard Munch’s The Scream. At its best, Europe is the Norwegian painter’s Despair.
The Guessing Game
What the ECB does next is anyone’s guess. It is keeping the door open for buying junk bonds. It has previously hinted of going deeper into subzero terrain. Ultimately, if its track record is anything to go by, the ECB will just do more of the same: QE infinity. Could this ignite a currency crisis? The euro has survived this long because the fiat empire is crumbling around it, and the myriad of other currencies are not remotely appealing. Like the U.S. dollar, the euro has yet to collapse because of the ineptitude of central banks around the world. And that is not saying much for Lagarde’s leadership or Draghi’s legacy.
Read more from Andrew Moran.