European policymakers acted decisively on Thursday to boost the economy with a massive expansion and extension of the European Central Bank’s bond purchases and a huge fiscal boost from the Germany, the bloc’s largest economy.
Expectations had been high going into the ECB meeting and the central bank met them with room to spare.
“The ECB’s announcement today that it is expanding its Pandemic Emergency Purchase Programme (PEPP) from €750bn to €1.35bn, extending its duration until at least end-June 2021, and that it will reinvest maturing principal repayments until at least the end of 2022, more than matches the high expectations which policymakers had encouraged ahead of the meeting,” said Andrew Kenningham, Chief Europe Economist at Capital Economics.
The ECB move came hard on the heels of another massive fiscal stimulus package worth €130bn or 3.8pc of 2019 Germany gross domestic from Berlin after two days of intensive debate in the country’s governing coalition.
While the package is smaller than the headline number suggests as not all of it is new money, it marks a major move to boost the German economy as it comes out of the deep coronavirus recession.
“Germany’s previous fiscal plans were already putting it among the best positioned economies to recover. In addition, we think that the stimulus flowing into next year means that the fiscal stance will be tightened less than previously assume in 2021 raising the chances of a sustained recovery,” said Oliver Rakau, Chief German Economist at Oxford Economics.
The moves came on the back of a European Recovery that will help hard-hit countries like Italy and Spain recover from the lockdowns that have pushed them into deep recessions.
It also sends a signal to the rest of the Eurozone countries that have fiscal room, having run budget surpluses, Ireland included.
“Germany has fully endorsed a counter-cyclical fiscal policy approach, for now. Many will see Germany’s leading fiscal policy response as a turnaround by a notionally fiscally hawkish country,” said Mr Rakau.
While Germany’s budget position is stronger than the one here, the decisive moves to support the economy there stand in sharp contrast to the debate here which now appears to centre on reining in spending.
Both the Irish Fiscal Advisory Council and the Economic and Social Research Institute have said the Government here will need to boost recovery spending in 2021.
Data yesterday from the Department of Finance showed that the Irish budget was holding up strongly despite an extra €5bn in spending thanks a surge in company tax receipts which means the Government should have more fiscal space.