Monetary policy supports euro area recovery from exceptional crisis

Central banks have acted swiftly in the crisis. During the course of the spring, the European Central Bank has further relaxed the conditions of the targeted longer-term refinancing operations, expanded the already extant broad asset purchase programme, and from the end of March commenced purchases under the new pandemic emergency purchase programme (PEPP). Moreover, interest rates remain low. ‘The Governing Council of the ECB will ensure that monetary policy will safeguard price stability, support growth and be transmitted to the real economy. The corona crisis has seen decisions taken on substantial measures to help businesses and households survive through the Great Lockdown,’ stressed Governor Olli Rehn today at the press briefing for publication of the new issue of the journal Euro & talous.

In June 2020, the Governing Council considered the inflation and economic outlooks for the immediate years ahead to have weakened further. Hence the decision to expand the PEPP by EUR 600 billion to a total of EUR 1,350 billion and to extend the programme’s duration until at least summer 2021. This will secure sufficiently light financial conditions and the smooth transmission of monetary policy to the real economy in different countries and in different sectors of the economy.

When the lockdown was in force, the main role of economic policy was to prevent a wave of bankruptcies and the emergence of mass unemployment. Fiscal policy to support aggregate demand has now taken on a more important role. Such a stimulus is useful when the main factor limiting output is exceptionally weak aggregate demand. Where necessary, even a substantial stimulus is possible in those countries where the general government finances and long-term prospects are sufficiently solid.

The coronavirus pandemic is a reminder that healthy public finances provide an irreplaceable shield when we hit hard times. ‘It is now important to both time and target the fiscal policy stimulus effectively. The corona crisis should not be used to introduce permanent increases in public expenditure that will further exacerbate an already substantial sustainability gap,’ said Governor Rehn. ‘It is essential to focus on investments and structural reforms that will improve future opportunities for growth in the economy, productivity and employment,’ he continued.

The current crisis is exceptional and more economic policy measures coordinated at the European level are also needed. The Commission’s recent proposal for an EU recovery instrument is in broad outline a step in the right direction, even though it will undoubtedly be somewhat changed after processing by Member States. From a Finnish perspective it is of paramount importance that the economy of our most important export market, i.e. the European Union, is on a stable foundation.

The economy is forecast to start a gradual recovery in the second half of the current year. We must ensure that in Finland, too, companies will be able to expand their output. A key factor here is the functioning of the labour market. ‘The Finnish labour market will need to show its mettle in the recovery phase, too,’ Governor Rehn reminds us. In many countries the price of labour responds rapidly to a weakening in the condition of the economy.

• Euro & talous publication website