27th March 2020

Serious measures

Aykut Efe, Economist at BCEE Asset Management (now Spuerkeess Asset Management), considers the current economic climate amid the coronavirus pandemic.

It’s a fact: the coronavirus pandemic will tip the global economy into recession as early as the second quarter of 2020, and developed economies will be the first to suffer. With a recession looming, governments and central banks are coordinating their policies to support the economy.

On the one hand, central banks have certain tools that are now well known, especially since the last financial crisis: asset purchase programmes (which of course follow cuts in key interest rates). On the other hand, governments are drawing up extremely expansionary fiscal policies to support producers and consumers.

Let’s start with the central banks

Altogether, more than 30 central banks, in both emerging and developed countries, have cut their key interest rates to mitigate the adverse impacts of the pandemic on the economy. But that’s not all. Massive asset purchase programmes have gradually been announced, mainly by the US Federal Reserve (Fed) and the European Central Bank (ECB).

After an emergency cut in key rates to 0%, the Fed removed all limits on its asset purchases and announced that it would also buy corporate bonds, whether on the primary or secondary market or via ETFs. The Fed also made sure that foreign markets could access dollars through swap lines opened with dozens of central banks.

The ECB initially fell short of market expectations when it announced an unambitious EUR 120 billion asset purchase programme. It subsequently changed course and increased its quantitative easing policy by EUR 700 billion under its Pandemic Emergency Purchase Programme, the twofold impact of which was announced in an unusually firm press release. There is also some merit in the argument that Ms Lagarde had her “whatever it takes” moment when she stated that the ECB had “no limits to its commitment to the euro”.

Governments are also making unprecedented efforts on the fiscal front. The scope of these fiscal policies can be summarised as follows: they are the most ambitious stimulus plans ever put in place in times of peace.

And that’s an understatement: the amounts are at least as eye-popping as those of the quantitative easing programmes. The US had originally discussed an initial amount of USD 800 billion. The Senate has today approved a USD 2.000 billion stimulus plan!

This plan includes USD 500 billion in bank loans and assistance for companies and, most importantly, a USD 1.200 cheque for adults with low incomes and USD 500 for each of their children. The staggering amount that the US government intends to inject into the economy represents 10% of US gross domestic product (GDP), or the equivalent of the GDP of a country like Italy.

In Europe, the European Commission suspended the fiscal rules of the Stability and Growth Pact which limit government spending. Governments will therefore be able to help businesses and households without breaking the rules of the Pact.

Even Germany, long known for its reluctance to take on debt to boost its economy, had to admit it had no other choice in this environment.


It therefore announced a vast EUR 800 billion stimulus plan, including EUR 600 billion in assistance for companies with the rest going to social spending. German investment bank KfW can also lend EUR 500 billion to German businesses facing liquidity problems.

France plans to make EUR 45 billion available to its businesses and households, and to guarantee up to EUR 300 billion in bank loans.

Central banks' and governments' swift response to the current crisis offers some reassurance.

The public authorities’ unprecedented actions show that they are fully aware of the gravity of the situation. While it is true that private consumption and investment will plummet while the pandemic persists, the government intervention gives us reason to hope that the damage will be limited once it is all over, with a minimum number of bankruptcies and an economy that can get back on its feet once the pandemic is behind us.