COVID-19 and the ECB: How to Manage the Economic Contagion?
Two weeks ago, we posted a detailed analysis of the coronavirus’ economic impact in which we demonstrated that the pandemic has caused a major exogenous supply-demand shock. This discussion included an exploration of whether the European Central Bank (ECB) should intervene. Concluding that the COVID-19 crisis and resulting economic contagion represent a clear and serious threat to both price stability (the ECB’s primary objective) and financial stability more broadly, we argued that monetary interventions are essential to mitigating the pandemic’s negative socio-economic consequences and aiding recovery. Consequently, the ECB should seek to stabilize the pandemic’s economic effects. As we enter the worst economic downturn since the Great Depression, failing to act could have devastating consequences. However, whether or not the ECB should intervene is not the only aspect to this debate. What form such intervention(s) should take is another central component. This discourse has intensified in the last month following the German Constitutional Court’s judgement questioning the legality of the ECB’s original quantitative easing program. While the legal framework of the ECB’s actions is certainly an important part of this conversation, it is also imperative to conduct a deeper examination of the macroeconomic implications of the institution’s policies. This expands beyond whether the ECB should intervene to encompass an analysis of the consequences of the various interventions at the bank’s disposal. These are the crucial issues this article will explore.