Coronavirus stimulus has to remain flexible

Coronavirus stimulus has to remain flexible

The European Central Bank (ECB) should not need to take into account the size of a country’s economy when buying government bonds as part of its stimulus program, a member of the central bank has told CNBC.

The comments by Banque de France Governor François Villeroy de Galhau come after the German constitutional court said earlier this month that the ECB should keep that link to avoid the risk of distorting markets.

The ECB has been buying large amounts of government bonds as part of its wider effort to mitigate the economic fallout from the coronavirus crisis. Its Pandemic Emergency Purchase Program (PEPP), announced in March, will see it buy 750 billion euros ($818 billion) by the end of the year. However, the program is different from other bond-buying initiatives, where the central bank links its monthly purchases to the size of a country’s economy.

Speaking to CNBC Tuesday, de Galhau said the stimulus program should remain flexible.

“PEPP is not only about volume, its main innovation … is its flexibility … we are not bound to a fixed amount per month … and we are not bound to predetermined partition through asset classes and through jurisdictions. So we are open on the volume, we are open on the end date, which is linked to the end date of the Covid crisis and in any case not before the end of this year, but still more if we want to guarantee the maximum efficiency of PEPP we shouldn’t be bound to capital keys,” he said.

Governor of the Central Bank of France, François Villeroy de Galhau, looks on as he attends the World Economic Forum (WEF) annual meeting on January 26, 2018 in Davos.


Capital keys is a technical term that refers to when the central bank links its government purchases to the size of a country’s economy. 

“Some central banks should be able to buy more; and others to buy less. If it’s needed to prevent unwarranted fragmentation, unwarranted market dynamics or liquidity gaps which we could have in the market,” the French governor said.

Earlier this month, the German constitutional court had brought up the issue of asset purchases according to economic size. In a ruling about a non-coronavirus stimulus program, the court asked the ECB to justify the volume of asset purchases under its quantitative easing program.

De Galhau’s comments follow a speech Monday in which he said the ECB will probably have to do more to keep the euro zone afloat. 

The ECB is due to meet next week. Analysts have wondered whether the central bank will increase its coronavirus stimulus program. At the current pace of purchases, analysts expect the ECB to reach the 750 billion euro limit by October. 

In addition to monetary stimulus, European governments are also working on additional plans to prop up the region as it faces the deepest crisis since the 1930s.

“The sooner it will come, the better it will be,” the French central banker told CNBC about this fiscal stimulus.

“We need a more coordinated answer. We did it on the monetary front … we now need it on the fiscal front.”

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