Go to content

Warning: members of the public are being contacted by people claiming to work for AXA Investment Managers UK Limited.  Find out more information and what to do by clicking here.

Investment Institute
Macroeconomics

COVID-19 update: Euro area policy response

Key points

  • The flexibility and proactivity of the European Central Bank (ECB) since the beginning of the COVID-19 crisis has been a positive surprise. Generous liquidity measures, easier collateral requirements, increases in asset purchases programmes and the creation of the Pandemic Emergency Purchase Programme, have helped the ECB maintain smooth credit flow to the private sector, stabilise markets and reduce fragmentation risks.
  • The Next Generation EU package is also a genuine step forward. Joint debt issuance, fiscal transfers and proposed joint tax revenues are politically meaningful. But the package is too small (around 5% of EU GDP) and slow (peaking in 2023-2024) to be a proper cyclical-stabilisation tool.
  • In the meantime, governments will remain on the hook. Fiscal responses should move from damage control to demand stimulus. Here Germany is leading the way, but other governments remain in ‘backstop’ mode.
  • Overall, we expect fiscal stimulus of around 4% for the Eurozone this year, far from the 9% needed to offset the COVID-19 induced permanent income loss.

The COVID-19 pandemic has resulted in an unprecedented response from governments and central banks worldwide. In previous papers, we looked into US fiscal and monetary stimulus to alleviate the shock on the economy1  , considered the impact of policy measures in China2  and dissected Japan’s 43% stimulus claims3 . In this piece, we focus on the Eurozone, considering the positive developments that have surrounded intra-governmental stimulus, as well as national measures.

ECB: Swift actions despite hurdles

The European Central Bank (ECB) has reacted swiftly and forcefully to the crisis, deploying multiple policy measures (Exhibit 1). The first line of action was to safeguard liquidity conditions in the banking system and ensure the smooth provision of credit to households and corporates. The highly accommodative pricing of the targeted longer-term refinancing operations (TLTRO) III programme – with interest rate as low as -1% from June 2020 to June 2021, if lending criteria, which have been eased as well, are satisfied – together with collateral easing measures provide strong incentives for banks to maintain credit flows to the real economy. TLTRO III take up in June has been massive, at €1.3tn, adding net liquidity of €548.5bn. Credit is flowing – growth of the broad money supply measure M3 surged to its highest level since 2008, at 8.3% year-on-year (yoy) in April from 5.5% in February. The increase was driven by higher deposits from both non-financial corporates (NFCs) and households, and was matched, in the NFC sector, by stronger provision of loans. Yet, if the ECB’ssupport through ultra-cheap medium-term liquidity provision, was a necessary contributor to a sustained supply of credit, it is not a sufficient condition for its continuation.

  • UGFnZSwgRC4sIOKAnENPVklELTE5IHVwZGF0ZTogVVMgcG9saWN5IHJlc3BvbnNl4oCdLCBBWEEgSU0gUmVzZWFyY2gsIDMgSnVuZSAyMDIw
  • IFlhbywgQS4sIOKAnENoaW5hOiBGdWVsbGluZyByZWNvdmVyeSB3aXRoIGFuIGV4dHJhIHBvbGljeSBraWNr4oCdLCBBWEEgSU0gUmVzZWFyY2gsIDkgSnVuZSAyMDIw
  • TGUgRGFtYW55LCBILiwg4oCcSmFwYW7igJlzIENPVklELTE5IHJlc3BvbnNlOiBDcmlzaXMgbWV0IHdpdGggc3Ryb25nIGVjb25vbWljIHBhY2thZ2UsIGJ1dCBpcyBpdCBlbm91Z2g/4oCdLCBBWEEgSU0gUmVzZWFyY2gsIDE5IEp1bmUgMjAyMA==

    Not for Retail distribution

    This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales, No: 01431068. Registered Office: 22 Bishopsgate, London, EC2N 4BQ. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    Risk Warning

    The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. 

    You are now leaving the AXA IM UK Ltd website.

    AXA IM UK Ltd is authorised and regulated by the Financial Conduct Authority and is not responsible for the content of external websites.

    Go back Continue
    Go back Continue