Pandemic Emergency Purchase Program (PEPP) must be flexible, according to Banque de France Governor François Villeroy de Galhau.
“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," he told CNBC on Tuesday.
"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.
De Galhau said that the European Central Bank (ECB) does not have to consider the size of a country’s economy when purchasing government bonds as part of its stimulus program.
The ECB is reportedly purchasing huge amounts of government bonds as part of its campaign to cushion the economic impact of the coronavirus crisis. Announced in March, the PEPP will buy 750 billion euros ($818 billion) by the end of 2020.
However, the program is not the same with other bond-buying initiatives, where the central bank patterns its monthly purchases based on the size of a country’s economy.
Capital keys exists 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 in May, the German constitutional court raised the issue of asset purchases based on economic size. A ruling about a non-coronavirus stimulus program called on the ECB to explain the amount of asset purchases under its quantitative easing program.
De Galhau’s remarks follow a speech Monday in which he stressed the ECB will make more effort to ensure that the euro zone is afloat.
The ECB will be meeting next week. Analysts are curious whether the central bank will expand its coronavirus stimulus program. With the flow of purchases, analysts believe the ECB will reach the 750 billion euro limit by October.
Aside from monetary stimulus, European governments are preparing other programs for the region as it grapples with the hardest 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.”
European economy
Europe will face 7.4% economic contraction in 2020, according to the European Commission. The institution expects the worst economic shock since the Great Depression in the 1930s.
Their forecast earlier in May lays out the initial estimates since European countries implemented lockdown measures due to the coronavirus outbreak. The European Commission said in February it may experience a 1.4% rise in GDP for the EU this year.
“While the immediate fallout will be far more severe for the global economy than the financial crisis, the depth of the impact will depend on the evolution of the pandemic, our ability to safely restart economic activity and to rebound thereafter,” Valdis Dombrovskis, vice-president for economic affairs said in a statement.
