MADRID/LISBON (Reuters) – The euro zone is facing a drawn-out recovery from a deep recession and needs more support from both the European Central Bank and governments, several policymakers said on Monday – just as the EU’s recovery fund hit its biggest obstacle yet.
With the euro zone likely heading back into recession this quarter, the ECB has already said it would provide more stimulus in December, most likely through an emergency bond buying programme and via ultra-cheap loans to the bank sector.
But fiscal support was in jeopardy on Monday after Hungary and Poland blocked the European Union’s budget and 750 billion euro ($888 billion) recovery fund, its largest joint fiscal effort yet, which is seen as vital to limit economic divergence.
“Given the worsening outlook for economic activity and inflation, the Governing Council of the ECB should increase the level of monetary accommodation and avoid fragmentation problems,” Spanish central bank chief Pablo Hernandez de Cos said.
ECB chief economist Philip Lane, who called for “significant” fiscal support, warned that even with a vaccine now nearing deployment, economic restrictions are likely to continue through next year.
“We do think all of next year there will be still interruptions to normal life … but by the end of next year, early 2022, I think there should be a return to normalization,” he told Portuguese broadcaster RTP.
The EU’s problem is that some of its most indebted members have taken the biggest economic hit from the pandemic, so they have less ability to boost their recoveries via domestic fiscal tools.
The collapse of the EU’s recovery fund would therefore likely increase the gap between the richer northern nations and the poorer south, a dangerous divergence that could fuel public discontent.
“Debt levels make massive support prohibitive. We need to be more demanding than before and the support measures have to be focused … and temporary,” Mario Centeno, Portugal’s central bank chief, told a conference in Lisbon.
The ECB next meets on Dec. 10, and most economists expect it to extend and expand its Pandemic Emergency Purchase Programme. It is also likely to provide cheaper loans via its Targeted Longer-Term Refinancing Operations.
(This story has been refiled to add missing currency conversion in paragraph three)
(Reporting by Sergio Goncalves and Andrei Khalip in Lisbon, Jesús Aguado and Emma Pinedo in Madrid; Writing by Balazs Koranyi; Editing by Ingrid Melander, William Maclean and Hugh Lawson)