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13th Aug 2022

Markets plunge after ECB and EU fail to convince

  • ECB president Christine Lagarde did not have a 'whatever it takes' moment (Photo: Council of the EU)

European markets saw a record plunges on Thursday (12 March) after the European Central Bank's policy actions to counter the economic impact of the coronavirus disappointed investors.

The EU's economy has also been hit by an unexpected travel ban to the US by president Donald Trump on Wednesday, which means an entry ban for foreigners who had been in the EU's Schengen area in the last two weeks.

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EU countries were introducing increasingly restrictive and tough measures to slow down the spread of the coronavirus across the continent, foreshadowing a major economic fallout.

Lagarde on Thursday said that "the spread of coronavirus has been a major shock to the growth prospect of the global economy and the euro area economy". She added that "even if ultimately temporary, it will have significant impact" on the economy.

The ECB decided to keep key rates unchanged, while boosting quantitative easing and liquidity tools in fresh stimulus efforts. It added €120bn of net asset purchases through the end of 2020.

Lagarde called on EU governments and institutions for "timely and targeted action to contain and mitigate the economic impact" of the outbreak.

"An ambitious and coordinated fiscal policy response is required to support business and workers at risk," the French politician and former IMF chief said.

"Governments and all other policy institutions are called upon to take timely and targeted actions," she added.

Lagarde has already warned EU leaders in a conference call on Tuesday that they risk the return of a financial crisis similar the 2008 one if they didn't act decisively.

2008 echo

Most analysts and the markets had been expecting a "whatever it takes moment" from Lagarde, in a reference to her predecessor Mario Draghi's vow to save the euro during the economic crisis.

However, Lagarde, while extending a helping hand to banks, businesses and employers, stressed the need for EU governments and institutions to act and protect the EU economy.

Asked if recession in eurozone is now unavoidable, Lagarde said that it "will depend on the speed, strength and collective approach that will be taken by all players".

With Italy in lockdown, the country in debt, and its banks full of bad debt, the euro crisis could also be reignited while some of the key EU policies, such as the deposit insurance scheme, are still missing after the 2008 financial crisis.

The ECB has small room for manoeuvre to help, because its interest rate is already at a record low, and in the last decade it has shored up government debt and offered money to banks to keep lending.

"If the 2008 financial crisis has taught us anything, it's that monetary policy alone cannot do the job, and that national measures are not enough – we need a joint and coordinated European fiscal stimulus," Iraxte Gacria, leader of the Socialist and Democrats group in the European parliament said in a statement.

Markets across Europe tumbled on Thursday. The European Stoxx 600 had its worst day ever, as it dropped 10 percent.

The French CAC 40 plunged more than 10 percent, German DAX fell more than nine percent, and the FTSE 100 index was down more than nine percent, making it the worst trading day since Black Monday in 1987.

EU action - or inaction?

The EU commission has so far signalled that it will relax state aid and deficit rules for the countries in need, and said that €7.5bn of the current EU budget could be used for mitigating the economic fallout.

The economic consequences of the outbreak have been exasperated by Trump's decision to impose an entry ban, for 30 days, on foreign citizens who had spent time in one of the 26 Schengen-member countries in the last two weeks.

On Thursday, the presidents of the European commission and European council, Ursula von der Leyen and Charles Michel condemned Trump for not consulting the US's allies beforehand.

"The coronavirus is a global crisis, not limited to any continent, and requires cooperation rather than unilateral action," they said in a statement.

In the meantime, Denmark and Ireland have also introduced tough restrictive measures, while Belgium, the Netherlands and Spain had been deliberating on more action.

In Brussels, the European school for children of EU officials was shut down for two weeks, while commission officials can chose to work from home, and non-essential commission staff have been told not to come into work.

Europe prepares piecemeal coronavirus shutdown

EU countries have introduced partial travel bans, shut down schools, sports and cultural events, closed cinemas and theatres in an effort to slow down the spread of covonavirus. Fears over the economic turmoil also grow.

EU steps up coronavirus fight in first online summit

As Italy went into lockdown EU leaders discussed a more coordinated response to the outbreak. The commission promised financial help, as more and more meetings are cancelled in the EU institutions.

Coronavirus: EU ministers urge members to share supplies

EU health ministers voiced concerns about the possible shortage of protective equipment and medicines in some member states, after Germany, France, and the Czech Republic blocked the export of anti-virus gear.

Coronavirus: EU at high risk amid global panic

The European disease prevention agency on Monday increased the risk of coronavirus infection in the EU to "high," as the outbreak spread to 18 member states. The commission also launched a "corona response team" to work on halting the disease.

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