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Europe is in trouble. The ECB is ready to unleash more stimulus

Posted October 29, 2020 9:42 a.m. EDT
Updated October 29, 2020 11:37 a.m. EDT

Europe is in trouble. The ECB is ready to unleash more stimulus

— The European Central Bank is getting ready to unleash even more stimulus, warning on Thursday of clear risks as the region's two biggest economies once again impose sweeping restrictions in an effort to curb the resurgent coronavirus.

The ECB said in a statement that it will respond "as appropriate" to the unfolding situation when it meets again in December, ensuring that "financing conditions remain favorable to support the economic recovery and counteract the negative impact of the pandemic" on inflation.

In a press conference, ECB President Christine Lagarde made clear that the central bank stands ready to act.

"Incoming information signals that the euro area economic recovery is losing momentum more rapidly than expected after a strong yet partial and uneven rebound in economic activity over the summer months," Lagarde said. The central bank is currently assessing its toolkit to determine how to best provide additional economic assistance, she said.

The central bank is widely expected to add billions more to its $1.35 trillion asset purchase program, which sits alongside the European Union's €800 billion ($938 billion) coronavirus recovery fund and has enabled even heavily indebted countries such as Italy to borrow money at zero interest.

The ECB "has clearly indicated its intention to provide more support in December," according to Andrew Kenningham, chief Europe economist at Capital Economics. "The new restrictions announced in France and Germany, and likely to be replicated elsewhere, will probably tip the eurozone economy into another recession," he wrote in a research note on Thursday.

France and Germany on Wednesday announced wide-ranging restrictions to stem a second wave of coronavirus infections.

France will begin a four-week nationwide lockdown starting next Monday. Non-essential businesses, restaurants and bars will be closed and people will only be allowed to leave their homes to go to work, care for relatives, keep a medical appointment, visit the grocery store or for exercise. France's lockdown will last until December 1 "at minimum," President Emmanuel Macron said.

In Germany, bars restaurants and cafés will shut starting on Monday except for takeout services. Theaters and concert halls will stop operating, as will amateur and recreational sports facilities. Schools will remain open in both countries.

Lagarde said Thursday that such measures have triggered a "clear deterioration" in the near-term economic outlook, complicating past projections that the region's economy would continue to grow in the last three months of the year.

"It's very difficult to predict how the month of December will offset the month of November," she said. "But we don't expect good numbers for November, obviously."

In the meantime, Lagarde plainly communicated that the ECB is prepared to take dramatic action, as it did when the pandemic first sparked lockdowns in March. She emphasized that the central bank still has plenty of tools at its disposal.

"The ECB was there for the first wave," she said. "The ECB will be there for the second wave."

Following her press conference, analysts said that only two real questions remain: What kind of help is coming, and how big the package will be.

Business activity in Europe was already in decline before stricter measures were announced, according to IHS Markit's latest Purchasing Managers' Index, raising expectations that key European economies will contract in the final quarter of 2020.

Economists at Allianz warned earlier this month of an "elevated risk of a double dip recession in countries that are once again resorting to targeted and regional lockdowns."

— Fred Pleitgen, Tara John and Claudia Otto contributed reporting.

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