>> GROUP: Shadow ECB Council / EZB-Schattenrat  José Alzola

José Alzola: The coronavirus outbreak will certainly have a transitory negative impact on the economy, first via a demand shock and probably in just a few weeks’ time via supply disruptions. If the disease expands in an uncontrolled manner in Europe (which does not seem to be the case so far), it will have severe and long-lasting negative effects on the economy. It is impossible for now to determine whether the benign or the pessimistic scenario will develop.
At this stage, the response should be similar to that in a natural disaster, consisting of relief measures by governments for the most affected areas and sectors, along the lines shown by Italy in recent days. For that purpose, the Eurogroup should show flexibility with the fiscal rules. For now, a monetary response is not appropriate: Financial conditions have not tightened in any significant way (if at all) and financial markets are functioning in an orderly manner (despite elevated volatility). Monetary easing just to contain an equity market correction is inappropriate.
The government relief measures should include also funding facilities for firms provided via development and public sector banks. I am not convinced that it is the role for the ECB to provide credit for specific purposes. In any case, the ECB is already providing plenty of liquidity with the existing round of TLTROs.
If, in coming months, the pessimistic scenario develops, governments should ease fiscal policy more aggressively than the limited relief measures imply. In this case, a monetary response will also be required, most likely in the form of continuing, even increasing, asset purchases. QE is the only tool that the ECB has at its disposal with meaningful room.
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