One year after the first cases were reported in Europe, the
coronavirus (COVID-19) pandemic continues to take a tragic human toll
and to pose enormous challenges to workers, firms, the financial system
and policymakers in the euro area.
Without the forceful responses of fiscal, monetary and prudential
authorities the economic and social costs of this crisis would have been
significantly higher. Governments, in particular, have stabilised
aggregate demand and incomes by absorbing economic and financial risks
of the private sector as the crisis unfolded.
Through the generous issuance of guarantee schemes, governments
secured a continuous flow of credit to firms, which supported economic
growth and protected financial stability. Monetary policy has
complemented these efforts by providing ample liquidity and restoring
favourable financing conditions.
As a consequence, the policy response to the pandemic has visibly intensified the interdependencies
between sovereigns, banks and firms. It has created a “sovereign-bank-corporate” nexus.[2]
In my remarks today, I will argue that the extent to which such interdependencies may create challenges
in the future depends, to a large extent, on the types of feedback loops they create. Broad fiscal and
monetary policy support today minimise the realisation of contingent liabilities in the future, and thus limit
the scarring effects of the pandemic on the economy, creating a virtuous circle.
So, contrary to the vicious “sovereign-bank” nexus[3] that plagued the euro area throughout most of the
last decade, the current nexus, if managed properly, can be an engine for a faster recovery, which also
supports the ECB’s price stability mandate.
A virtuous circle between sovereigns, banks and corporates
At the onset of the pandemic, the strict lockdown measures hit large parts of the corporate sector hard,
raising its vulnerability to levels last seen during the global financial crisis (Chart 1). Many firms saw their
revenues collapse and were facing acute liquidity shortages that threatened to turn into solvency
problems.....