Euro zone may need more fiscal, monetary support because of second COVID wave – IMF

© Reuters. FILE PHOTO: The logo of the International Monetary Fund (IMF), is seen during a news conference in Santiago

By Jan Strupczewski

BRUSSELS (Reuters) – Euro zone governments and the European Central Bank may need to provide more fiscal and monetary support than initially expected because of the effects of the second wave of the COVID-19 pandemic, the International Monetary Fund said on Monday.

The overall value of fiscal and monetary support on offer, combined with access to trillions of euros of cheap loans and new EU-level funding still under debate, already exceeds 10 trillion euros.

The IMF said that while that response is impressive, more might be needed if the economic outlook deteriorates further.

“Risks … remain clearly to the downside through early 2021 given the ongoing second wave,” the IMF said in a regular review of the euro zone economy.

“With the ongoing second wave, national fiscal policies will likely need to provide broad-based support for longer than initially envisioned.”

In an unprecedented show of solidarity, European Union governments have agreed to jointly borrow 750 billion euros over the next few years against the security of the EU budget. They will disburse the money amongst themselves as grants and loans to help the economy recover from the effects of the pandemic.

The IMF said the impact of that scheme would depend on the scale, quality and efficiency of national spending it supports and structural reforms aimed at transforming economies to be greener and more digital.

The Fund praised the monetary policy response of the ECB to the economic downturn caused by the pandemic as appropriately bold, but said further support was likely to be needed, possibly including more cheap TLTRO loans and other help for banks.

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“Expanding asset purchases will be the first line of defence, but other options — including further relaxation of Targeted Longer-Term Refinancing Operations’ terms and a deposit rate cut — should also be considered,” it said.

“Even greater accommodation would be needed to counter deflation risks and ensure smooth monetary transmission in a downside scenario,” the IMF report said.

Euro zone consumer prices have been falling year-on-year since August for the first time since 2016, further challenging the ECB which wants to keep inflation just under 2% in the medium term but has for years failed to reach that target.

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