Gilles Moëc, AXA Group Chief Economist | This Thursday could be a key moment for Europe, with the ECB meeting and the beginning of the European council. We could get a positive surprise on the time extension of PEPP, but the constraints on the “top-up” are significant. There is some tentative progress on the “rule of law” spat but hurdles abound. The Council meeting could bring about the denouement of the Brexit saga.
This Thursday could be an important day in Europe. The ECB has telegraphed another much-awaited layer of monetary accommodation, designed essentially to create financial space for accommodative fiscal policies across member states. The same day, the European Council will start. While these items are not on the official agenda, it is highly likely that this meeting will provide another occasion to try to unlock the “rule of law” spat, while we would not be surprised if this could bring about the denouement of the Brexit negotiations.
Our baseline for the ECB announcements is that PEPP will be raised by another EUR400bn and extended to December 2021, with strong pledges to do more and longer if needed to “preserve market conditions”. Given the recent “noises from Frankfurt” reported by Bloomberg, we see a strong risk the Governing Council will opt for a straightforward extension to June 2022, but we don’t think the quantum of purchases can significantly exceed EUR500bn and keep some powder dry. Indeed, although PEPP is the ECB’s most flexible quantitative easing instrument, we think it is still bound by keeping the central bank’s overall holding of any sovereign eligible debt below 50%. Exact quantifications are difficult, but beyond EUR600bn for the top-up to PEPP, the ECB would be sailing very close to the wind. The ECB is doing a great job at delivering the top of what it can, given its constraints. Yet, thorny questions will remain. How healthy can it be that by the time the pandemic crisis ends, there would be no additional accommodation capacity left to speak of?
Will governments be able to take advantage of the monetary stimulus? We have seen tentative progress towards a more conciliatory approach from Poland, but Hungary still seems far from the compromise needed to unlock the Next Generation programme. Conversely, in the US, some more tangible progress is underway. A group of 10 Senators from the two parties is proposing a package of more than USD 900bn (c.5% of GDP). This is not the first effort of this nature, but this time it is being backed by President-elect Biden and the leader of the Democrats in the Senate. A demonstration of bipartisanship in December already would be a strong illustration that the ultra-confrontational Trump era is drawing to a close.