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Interview with Radio anch’io, Rai Radio 1

Interview with Fabio Panetta, Member of the Executive Board of the ECB, conducted by Giorgio Zanchini on 5 June 2020

5 June 2020

My first question is partly taken from the front page of Corriere della Sera, and that is: is the ECB worried about recession, and is that what triggered yesterday’s decision?

Yesterday’s decision was triggered by the tensions that we are experiencing in the euro area economy. At yesterday’s meeting, we discussed the new projections for growth and inflation. We have seen that the prolonged lockdown of economic activity has hit many euro area countries very hard and has caused deflationary pressures to resurface. Inflation is very low and is expected to remain so over the entire horizon covered by our projections (that is, the next two years). We acted in accordance with the ECB’s mandate to ensure price stability at the European level, and expanded our programme for purchasing securities.

Mr Panetta, what are the projections for the euro area for the next two years?

Every three months, the ECB publishes its projections for growth and inflation in the euro area over the following two years. Yesterday we published the projections for June and, as was to be expected, they were much worse than the previous set of projections. The outlook for growth for this year, 2020, has fallen by almost 10 percentage points, which is huge. Before the pandemic, growth was projected to be just below 1%, and now we are looking at a contraction of more than 8.5%. So, this difference between 1% in the pre-crisis projections and a recession of around 8.5% – that’s the effect of the pandemic, that’s the coronavirus effect. We expect to see an improvement in 2021 and 2022, but this will only go some way towards mitigating the effects; it will not make up for all of the fall in economic activity this year.

And what about Italy, Mr Panetta?

We don’t publish projections for individual countries, but Italy will clearly follow a similar path. The Governor of the Banca d’Italia gave some data in his recent Concluding Remarks. According to the latest estimates, the Italian economy is expected to contract by between 9% and 13%. Of course, these estimates are surrounded by a high degree of uncertainty, because economic developments in the coming months will probably not be dictated by the laws of economics, but very probably by variables that are much less well known. Will there be a new wave of infections? Will there be a vaccine? Will there need to be another lockdown phase or social distancing measures? We don’t have the answers to these questions, and there is clearly a very close relationship between the measures to contain the pandemic and economic developments. However, the Italian economy will follow a similar path to that of the European economy, with a very strong fall in economic activity this year and partial recovery in the following years.

One last question: this is an excellent parachute – I’m using a term from one of today’s newspapers – for our public debt, among other things, sales of bonds have been excellent. Some are now asking whether all the instruments being made available by the European authorities – and I’ll try to list the main ones without making a mistake: the SURE programme, the EIB, the Recovery Fund – are they not making the ESM, for example, useless? I understand that it’s not your role to answer. But do we really need all of these financing measures if in reality there is this safety net, this parachute of yours?

Well, the market conditions we observe depend on the information investors have at their disposal. Investors know that this is a very large purchase programme implemented by the ECB to finance the economy, keep a lid on borrowing costs and provide liquidity. They also know that these are measures that have been taken and that others are being discussed by the European authorities. It would be a mistake for people to believe – after the fact, and seeing that conditions are relatively positive and calm – that this situation is entirely unrelated to the steps that have been taken beforehand. What we see on the markets, the degree of optimism – or reduced pessimism – and the greater sense of calm that is a result of all the decisions taken by national and European authorities. It would be wrong to think that these measures are useless.

So, you detect a note of relative optimism?

Compared to a few weeks ago, there is no doubt about it. It has become clear that, first of all, the ECB will take action, it will do so in a decisive way, and it will not allow a tightening of financial conditions to further weigh on the euro area economy. Second, even though the situation has been somewhat challenging at times, it has become clear that the authorities at European and national level are taking action. They are taking decisive steps relatively quickly. The ECB has acted with maximum speed. We decided yesterday to extend our purchase programme. In a few days’ time, our purchases will already have been expanded. The European authorities are discussing sizeable measures in a time frame which up until only a few weeks ago would have been unthinkable.

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