FRANKFURT, Germany— The European Central Bank has now adopted a strategy that has not yet been considered in the U.S.–paying banks to make loans.
The coronavirus pandemic has put Europe into a downturn that hasn’t been since the end of World War II, and the worst is yet to come, according to Europe’s top central banker.
“The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime,” said Christine Lagarde, the president of the European Central Bank.
Lagarde warned the eurozone economy could shrink by as much as 12% in 2020.
Seeking to stem the crisis from becoming even bigger and longer lasting, the ECB’s Governing Council has voted to effectively pay banks to lend money, in addition to vowing to do whatever else might be necessary to counteract the economic impact of the pandemic.
Conditions For Loan
Under certain conditions, the central bank will allow commercial banks in the eurozone to borrow at a rate of minus 1%, provided the money is passed on to businesses and consumers. According to TheStreet.com, the program has few strings attached and banks will be able to borrow as much as they want from the central bank at a negative rate of 0.25%.
The negative interest rates mean that banks could borrow up to €3 trillion, or $3.3 trillion, without having to pay all of the money back, TheStreet.com analysis said.
Similar to the strategy adopted in the U.S. by the Fed, the European Central Bank also said it was prepared to further increase its purchases of government and corporate bonds, a form of money printing intended to keep market interest rates low and make it easier for businesses and consumers to get credit.
“We are fully flexible, and we will look at all options,” Lagarde said.
The ECB is forecasting the European economy will rebound later in the year, but expects the total decline for 2020 will be at least 5% and as much as 12%.