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11 Dec 2020
3 min read

ECB Adds Fresh Stimulus, EU Members Agree on a Budget

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Written by OspreyFX News Team

ECB Adds Fresh Stimulus, EU Members Agree on a Budget

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Key Takeaway

  • Fund injection for the pandemic-stricken European economy
  • Veto hurdle finally surpassed

The European Central Bank decided to expand its bond-buying programme by an additional €500bn while also providing extra-cheap funding for banks. During Thursday’s ECB policy meeting, ECB President Christine Lagarde approved the launching of fresh stimulus to support the pandemic-stricken eurozone economy. The additional €500bn would be purchased over a long period as they are now part of the pandemic emergency purchase programme (PEPP) that has amounted to €1.85tn. The programme’s expiry date was extended from June 2021 to March 2022 with the option to reinvest any proceeds by 2023. The central bank also extended to June 2022 the funding to banks at a rate of -1.00%, meaning it will effectively pay banks to borrow money as long as they keep the credit flow going.

The package’s immediate purpose is to help offset the downward impact of the pandemic on the eurozone economy and avoid a double-dip recession. According to ECB President Lagarde, the eurozone economy is projected to contract by 2.2% in the fourth quarter with a continuation of the downslide into the early months of the next year. Ms Lagarde emphasized the positive effect that the vaccine has on the economy while expressing optimism that by the end of 2021 “the economy will begin to function under more normal circumstances”.

The ECB expects the eurozone to grow by 3.9% in 2021 while raising the forecast to 4.2% for 2022 and 1.4% for 2023, which is below the target of 2%. The central bank also assumed there would be no Brexit deal between the UK and the EU. During the meeting, the ECB confirmed that deposit rates stay unchanged at -0.5%.

The EU Prepares for Budgetary Implementation After Overcoming Veto Impasse

On the topic of the euro and its recent appreciation, the ECB President said that the institution monitors the exchange rates “very carefully”. Earlier in December, the euro reached a 2.5-year high against the US dollar and is currently hovering close to the same high of 1.2177 reached on Dec 4. The EURUSD rate is now trading slightly above 1.2150, also aided by a weaker dollar across the board. An expensive euro could do some harm to the eurozone economy as it threatens to weigh on inflation and exports.

The other big event for Thursday was the EU leaders summit in Brussels and the main topic of discussion, the €1.8tn budget stand-off. The good news, Hungary and Poland agreed to drop their veto on the next seven-year budget and the coronavirus relief package. The veto was on the rule of law provisions linked to the budgets and the disbursement of funds.

The EU managed to win over Hungary and Poland by presenting to them a non-binding declaration that guarantees the two countries will not be specifically targeted by the rules described in the agreement. The deal opens the door to the enactment of the Next Generation EU (NGEU) fund, a €750bn recovery fund intended to provide budgetary support to member states. It also paves the way for the seven-year budget, the 2021-2027 multiannual financial framework (MFF), to be approved. Both EU budgets have a combined worth of €1.8tn.

Following the leaders’ approval of the budgets, the president of the European council, Charles Michel, expressed delight by tweeting “Now we can start with the implementation and build back our economies.”