European Central Bank stimulus on track as economy struggles

Long time exposure photo shows aircrafts flying over the buildings of the banking district in Frankfurt, Germany, Thursday, Jan. 21, 2021. (AP Photo/Michael Probst)

FRANKFURT, Germany (AP) — With more than a trillion euros in stimulus still in the pipeline to the economy, the European Central Bank left its key bond-purchase program unchanged Thursday as the 19-country eurozone endures a winter economic slowdown due to the pandemic.

ECB President Christine Lagarde told a news conference that the economy likely contracted in the last three months of 2020 and the outlook going forward faced risks.

Coronavirus infections and deaths have risen during the winter, leading to new restrictions on businesses. Germany has extended its partial lockdown until Feb. 14, France has imposed a 6 p.m. curfew, and Portugal has hit multiple records in case numbers.

Lagarde said that while the start of vaccinations against the coronavirus was an important milestone the outbreak continued to pose “serious risk to the eurozone and global economies.” Manufacturing continues to hold up well, but services are being “severely curbed,” she said.

As a result, “an ample monetary stimulus remains essential” and the ECB stands ready to “adjust all its instruments” if needed, she added.

The European Union’s executive commission forecasts that the eurozone economy shrank 7.8% last year and should rebound by 4.2% this year. Official numbers for last year are to be released Feb. 2.

The economy is being propped up by massive stimulus from the ECB, national governments, and the EU. The ECB’s decision not to adjust its key programs was largely expected because it added a major dose of stimulus only last month, at its Dec. 10 meeting. The governing council added 500 billion euros to its pandemic emergency stimulus bond purchases, bringing the total to 1.85 billion euros ($2.2 trillion), and extended the regular purchases through at least March 2022. More than half of that total is still waiting to be deployed.

The bond purchases are a way of pumping newly created money into the economy, which aims to raise inflation from levels that are currently considered too low. The purchases also keep market interest rates down so that companies can access the credit they need to get through the pandemic recession.

One result of the purchases is that governments can use the bond market to borrow cheaply as their deficits rise through spending on pandemic support, such as paying salaries for furloughed workers to avoid layoffs.

Additional stimulus is on the way from the EU’s 750 billion-euro fund established to support the recovery through shared borrowing by member countries — a step toward further solidarity and integration among the 27-member EU. The fund is to support projects that reduce emissions of carbon dioxide, the main greenhouse gas blamed for climate change, and that promote the spread of digital technology and infrastructure.

The ECB is the chief monetary authority for the countries that use the euro, playing a role analogous to that of the Federal Reserve in the U.S. It sets key interest rate benchmarks and supervises banks. So far, 19 of the 27 EU countries have joined the euro.