Monday’s meeting focused on the recent decision of the German Constitutional Court on the ECB’s Public Sector Purchase Programme.
But Lagarde also used the occasion to spell out the scale of the economic crisis caused by the coronavirus pandemic.
Lagarde, in her quarterly appearance before the Committee, said the “unprecedented crisis” was the worst in peacetime and was “of no one’s fault or making but is one that will affect everyone.”
She said, “Mastering the recovery will require extraordinary action at EU and national level.”
Lagarde said that measures designed to combat the spread of the disease has already caused an “unprecedented contraction” in European economies, with a fall of 3.8 percent in GDP across the EU in the first quarter of 2020.
Economies will shrink further by 13 percent in the second quarter and, despite “bouncing back later this year and recovering some lost ground”, EU-wide GDP is predicted to fall overall by 8.4 percent over the entire year.
“The sharp drop in economic activity over the year also has a bearing on inflation and the economic outlook has been revised downwards substantially” Christine Lagarde, ECB President
The brighter news, she told the Committee, was that a recovery is expected in 2021 with economic growth of 5.2 percent.
She told the Committee, “The sharp drop in economic activity over the year also has a bearing on inflation and the economic outlook has been revised downwards substantially.”
The impact is different from one Member State to another. For example, Germany is heading for its worst recession in 70 years with GDP expected to shrink 6.3 percent this year.
Italy's unemployment rate, already among the highest in the EU, is now 8.4 percent and the economic paralysis caused by the Coronavirus is expected to push it higher.
Lagarde said the ECB, despite criticism from some quarters, had acted to help combat the worst of the economic fallout, saying, “We had to move very fast to the crisis and we did so.”
Lagarde said she welcomed the Commission’s recently announced €750 billion recovery fund proposal, “Next Generation EU”, of which €500 billion will be non-refundable grants. The fund still needs approval by Member States before it can take effect.
She told the Committee, “It will be important to adopt this package quickly and any delay risks generating negative spill-overs and driving up the costs, and hence the financing needs of this crisis.”
Italian MEP Irene Tinagli, who chairs the Committee, also noted that Europe’s economic outlook had “dramatically changed” since Lagarde last appeared before the Committee on February 6.
She said, “EU GDP will fall by 8.4 percent in 2020 before rebounding by 5.2 percent in 2021.”
The Socialist member added, “We have to learn some lessons from the crisis. This includes recognising the importance of the single market and also the crucial role played by EU and national authorities in maintaining economic confidence during the pandemic.”
“We have to learn some lessons from the crisis. This includes recognising the importance of the single market and also the crucial role played by EU and national authorities in maintaining economic confidence during the pandemic” Irene Tinagli MEP
MEPs asked about the effects of the German Constitutional Court’s unprecedented decision in May to dismiss a ruling of the European Court of Justice on the ECB’s Public Support Purchase Programme launched in 2015 to stabilise the eurozone.
Some Committee members asked how the concerns raised by the Constitutional Court would affect the need for the ECB to be held more accountable, namely through its relations with the European Parliament. Others asked about the potential effects on how the ECB would structure its other purchase programme (the PEPP).
German member Markus Ferber said the impression was that the “ECB is subject only to the jurisdiction of the ECB,” adding, “I would like to know how the PEPP programme can be brought into line with the ECJ ruling.”
The EPP member said, “I also have to say that the impact of PEPP does not appear clear.”
Lagarde replied to such criticism by saying the ECB “constantly evaluates whether its policy measures achieve their intended purpose.”
Later on Tuesday the ECB will hold a briefing to discuss current issues related to banking supervision during the pandemic crisis and the impact of supervisory relief measures.