Draghi Urges EU Govts To Shield Economies

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Draghi urges EU govts to shield economies

Former European Central Bank chief Mario Draghi said he is in favour of massive interventions by governments on the continent to preserve economic structures through the coronavirus shutdown

Frankfurt am Main, (APP - UrduPoint / Pakistan Point News - 26th Mar, 2020 ):Former European Central Bank chief Mario Draghi said he is in favour of massive interventions by governments on the continent to preserve economic structures through the coronavirus shutdown.

"The loss of income incurred by the private sector -- and any debt raised to fill the gap -- must eventually be absorbed, wholly or in part, on to government balance sheets," Draghi wrote in a Financial Times opinion article late Wednesday.

Comparing the impact of the virus to World War I, the Italian economist said government debt would have to balloon "to protect citizens and the economy against shocks that the private sector is not responsible for and cannot absorb." "The alternative... would be much more damaging to the economy and eventually to government credit," he added.

Only the state has the power to protect jobs and support companies' liquidity with measures like guarantees for bank loans to business and direct handouts, Draghi wrote.

"A change of mindset is as necessary in this crisis as it would be in times of war," he added.

- Governments hesitant - European governments have moved at different paces to contain the impact of the coronavirus crisis.

Nations like Germany and France have unleashed big-bang interventions -- MPs in Berlin voted through a 1.1-trillion-euro ($1.2-billion) rescue package Wednesday -- but more heavily-indebted states like Italy and Spain have been more hesitant.

The EU has for now suspended limits on its members' debt and deficit levels to give national capitals a free hand in fighting the crisis.

Meanwhile, the ECB under its new president Christine Lagarde has unleashed 750 billion euros of "quantitative easing" (QE) bond-buying aimed to shore up financial conditions in the eurozone during the coronavirus crisis.

Pictet Wealth Management economist Frederik Ducrozet described the "Pandemic Emergency Purchase Programme" (PEPP) as a "game-changer" for the euro area.

It was announced just days after the ECB extended its existing QE scheme, a programme of cheap loans to banks and looser conditions for financial firms under its supervision.

A video conference with EU leaders today could unleash still further firepower from the ECB.

The EU Council is unlikely to agree on jointly-issued "coronabonds" called for by nine countries including France, Spain and Italy, with debt mutualisation still a taboo among wealthy northern states like Germany and the Netherlands.

Instead, the bloc could move towards activating the European Stability Mechanism (ESM) created during the financial crisis.

Countries granted credit from the ESM's capacity running into hundreds of billions of euros are also eligible for an unlimited ECB bond-buying scheme known as OMT.

Crafted on Draghi's watch during the financial crisis but never used, OMT is widely credited with calming fears about the breakup of the eurozone.

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