ECB cannot fight a recession alone, says former IMF economist


The European Central Bank will struggle to fight the next recession on its own, former IMF chief economist Olivier Blanchard told CNBC Monday.

Amid the vast stimulus that the ECB put forward in the wake of the sovereign debt crisis, there are growing doubts on whether the central bank will be able to deploy the same level of intervention whenever the next crisis hits.

“I am nearly sure that the ECB cannot by itself at this point fight a recession, that it will need help, it is fairly obvious,” Olivier Blanchard, former chief economist at the IMF told CNBC’s Annette Weisbach in Sintra, Portugal.

He explained that the question is not so much the lack of available tools, but more their actual impact on the market.

“They have a lot ammunition, the question is how much it kills, because they can really buy assets in large quantities, but it may at this stage have little effect on the rates, which is what matters in the end,” Blanchard added.

The ECB ended its three-year long bond-buying program in December last year, known as quantitative easing. The purchase of government bonds in the euro zone reached about $3 trillion, but the central bank also bought corporate debt and has kept interest rates at record low levels. The bank’s rates on its marginal lending facility and deposit facility are at 0%, 0.25% and 0.40%, respectively.

“It seems to me the high question … (is) what are your tools, at the present moment, if you have to cope with difficulty, which will require continuation of this very, very non-conventional measures,” Jean-Claude Trichet, a former ECB president, also told CNBC’s Annette Weisbach.

“We are in a situation where the pillar of stability in Europe is very, very much the central bank and it would be a mistake in my opinion to give the impression that pillar is about to collapse,” Trichet added.

There has long been an ongoing criticism on euro zone governments for not doing enough to improve their countries’ fiscal position, relying solely on the ECB and on monetary policy to boost the economy.

ECB President Mario Draghi has often made that point. “All countries should reinforce their efforts to achieve a more growth-friendly composition of public finances. Likewise, the transparent and consistent implementation of the European Union’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy,” Draghi said in April last year.

Speaking to CNBC, Blanchard also said that “monetary policy needs help from fiscal policy.”

However, different analysts have raised doubts whether governments will do their part in the near future, given that the structural reform effort was not quite there in the aftermath of the 2011 sovereign debt crisis.

The IMF said in a report last week that “high-debt countries have not sufficiently consolidated, and in some cases have even eased fiscal policy… Should growth deteriorate sharply, a more active fiscal policy response will be needed.”

Gertrude Tumpel-Gugerell, former member of the executive board, also told CNBC that it is not only up to the central bank to ensure economic stability.

“The ECB is the backstop for the economy so therefore there’s always room for doing let’s say more and taking additional steps but of course the ECB would also expect governments and fiscal policy to come in and also act,” she said Tuesday.