The current European debate on fiscal policy: Too much and too little

In the last two weeks the European Central Bank (ECB) decided to launch new LTRO and T-LTRO programs to ensure liquidity to the banking sector as well as to small- and medium-sized firms (March 12, 2020) and to temporarily strengthen its ‘quantitative easing’ policy (March 18, 2020), which is centered on the purchases of government bonds and of a large set of private financial assets (including commercial papers). Moreover, the Single Supervisory Mechanism improved the positive impact of the ECB’s initiatives by temporarily weakening the capital requirements and the assessment of the non-performing exposures of the European banking sector. Finally, the European Commission (EC) decided to suspend the European coordination mechanism of the national fiscal policies, that is, the Stability and Growth Pact (SGP). This last step was considered crucial, since it is commonly agreed that even a generous unconventional monetary policy cannot face the short- and medium-term economic impact of the current pandemic shock. The T-LTRO and the ‘quantitative easing’ may, at most, provide liquidity to different economic activities and flatten the structure of interest rates; they cannot absorb the ‘real’ shock on the supply side and transfer income to temporarily unemployed workers and to households. The latter are duties that pertain to fiscal policy.