The ECB faces the challenge of Coronavirus

ECB, Coronavirus,

On the eve of the ECB board meeting,the Research Department of Intesa Sanpaolo highlights some necessary economic and monetary policy measures.

The meeting of the Governing Council of the European Central Bank (ECB) on 12 March is eagerly awaited.
As a report from the Research Department of Intesa Sanpaolo highlights, COVID-19 will force the ECB to significantly reduce its growth estimates for 2020, which will drop below 1% even without incorporating particularly negative scenarios of the impact of the epidemic. Those of 2021, however, could remain unchanged. This is what the Report notes, according to which the Institute of Frankfurt will propose an interpretation of shock as a transitory phenomenon, with uncertain medium-term effects. The ECB should also assess the net impact on prices as predominantly disinflationary, particularly in 2020, and inflation forecasts should be tight.

Possible economic policy interventions by States

COVID-19 expects heavy and transitory effects on economic activity related to containment measures, which however could become persistent if they led to the closure of companies due to liquidity crises. A problem that cannot be addressed with monetary policy, but above all requires fiscal measures. Several European states are moving in this direction.

The economic policy intervention must tend to alleviate the pressure on the liquidity of the affected companies until the situation has normalized. This, according to Intesa Sanpaolo economists, can happen in two ways:

1. the State can intervene with the suspension of payments of taxes and social contributions, and with the extension of social safety nets to reduce the impact on income and consumption. This is already happening in the first affected European country, Italy. There is no role here for the ECB;

2. measures that favor the access to credit of companies in temporary difficulty must be considered. In this context there is something that the ECB could also do to stop the turbulent state of the markets.