President of the European Central Bank, Christine Lagarde, has warned the European Union cannot reduce its commitment to economic stimulus as the Eurozone continues to face economic challenges.
Speaking to EU leaders yesterday Ms Lagarde said the public sector’s faith would stimulate private sector confidence.
“Pandemics are highly infrequent and unpredictable events, and consequently, the economic outlook is characterised by high uncertainty,” she said. “The key challenge for policymakers will be to bridge the gap until vaccination is well advanced and rolled out and economy and recovery can build its own momentum. In this situation, it is pivotal that public policies chart a clear way forward and inspire confidence to European citizens.”
Good public policies are what will allow us to persevere in these challenging times, added Ms Lagarde but to do so, they will need to be both ambitious and realistic.
“Clearly, the latest news on the vaccine looks very encouraging,” she said. “The recent surge in coronavirus cases and the associated reimposition of a number of containment measures are adding to the already heightened level of uncertainty and present a serious challenge to the euro area and to the global economy at large.
“Following a strong but partial and uneven rebound in real GDP growth in the third quarter, latest surveys and high frequency indicators signal that euro area economic activity lost momentum going into the fourth quarter. The resurgence in Covid-19 infections is weighing, particularly on the services sector activity. That is so for sectoral reasons that we can all think of, but also it is especially vulnerable to the voluntary and mandatory social distancing measures that were introduced.”
As such Ms Lagarde warned consumers are expected to remain very cautious in the current, “highly uncertain environment” as the ramifications of the pandemic threaten people’s employment and income prospects. In turn, subdued demand and the weakening of firm’s balance sheets and profitability are weighing on business investment.
Companies are likely to remain hesitant about committing funds to long term investments as long as there is continued high uncertainty on how the pandemic will unfold and when, as well as the possible rollout of a successful vaccine.
“Overall, the euro area economy is expected to be severely affected by the fallout from the rapid increase in infections and the reinstatement of containment measures, posing a clear downside risk to the near-term economic outlook,” she said. “We responded promptly and forcefully to the first wave that hit the euro area economies by designing new tools specifically tailored to the nature of the shock and recalibrating our well diversified portfolio of existing instruments. Measures have been very successful in stabilising financial markets and underpinning economic activity, thereby helping to offset the downward impact of the pandemic on the projected path of inflation.”
Therefore, there was a need to “address the current phase of the crisis with the same approach and the same determination”.
Ms Lagarde concluded: “As Johann Wolfgang van Goethe once said, ‘In the realm of ideas, everything depends on enthusiasm. In the real world, all rests on perseverance.’ So, we shall persevere.”