Only a few weeks ago, Christine Lagarde was focused on the wonky workaday tasks of running the European Central Bank.
Abruptly, the stakes are much higher now, as Ms. Lagarde, who became the E.C.B.’s president in November, confronts a widening crisis. The rapid spread of the coronavirus in Europe has pushed the eurozone’s already wobbly economy toward recession, and when she speaks on Thursday, Ms. Lagarde will be under intense pressure to take action.
The pressure to send a powerful signal rose Wednesday after the Bank of England became the latest major central bank to announce a broad package of stimulus measures.
But there’s one key problem. The European Central Bank has been in nearly nonstop crisis mode since 2008, and it has few cards left to play.
It cannot, for instance, follow the Federal Reserve and Bank of England in slashing interest rates. Both cut their main rates by half a percentage point, a significant move. The E.C.B.’s main interest rate, the one it charges commercial banks for short-term loans, is already zero.
Ms. Lagarde’s credibility, a central banker’s stock in trade, hangs on how she handles the crisis with the limited resources at her disposal. The burden on her may be especially heavy because she is the central bank’s first female president.
Ms. Lagarde is no stranger to crises. As managing director of the International Monetary Fund, she was deeply involved in the eurozone rescue plan in response to the Greek debt meltdown in 2010. But she had no experience as a central banker and, unlike her predecessor, Mario Draghi, does not have a doctorate in economics.
What Ms. Lagarde says at a news conference Thursday may be just as important as what the European Central Bank’s Governing Council does when it meets beforehand to discuss monetary policy. Ms. Lagarde must allay fears that the central bank is out of ammo and powerless to calm financial markets.
That won’t be easy. When the Fed cut its benchmark rate by 0.5 percentage points last week, the market rally afterward lasted all of 15 minutes. The European Central Bank has much less room to maneuver than its American counterpart, and the crisis has only grown worse since the Fed acted.
Here’s a look at some of Ms. Lagarde’s limited options.
Interest rate cut
The European Central Bank is widely expected to cut the rate it charges banks to park money in its virtual vaults. The rate is already negative 0.5 percent, a de facto penalty on deposits that is intended to encourage commercial banks to lend their cash instead of hoarding it.
The Governing Council will probably cut the rate to minus 0.6 percent. A bigger cut is possible, but any move won’t affect the cost of money that much. The main purpose would be to lift financial market morale and show that the central bank is on the case.
Buy more bonds
Since 2016, with a brief intermission last year, the European Central Bank has been buying government and corporate bonds on the open market as a way of increasing demand, pushing down market interest rates, and making it cheaper for governments and companies to borrow money.
On Thursday, the central bank may announce that it is increasing the size of the purchases, which amount to 20 billion euros, or $23 billion, each month.
One problem is that the central bank has already bought so many bonds that supply is running low. Florian Hense, an economist at Berenberg Bank, suggests that the central bank could solve that problem by raising its self-imposed limits on how much of a given bond issue that it buys, and tilting its purchases toward corporate bonds, which are more plentiful.
Free money for business loans
The central bank is also widely expected to expand an existing program that allows commercial banks to borrow newly created money at a negative interest rate, if they lend the money to eurozone businesses. The central bank could tailor the program so that the money flows to small businesses like restaurants, hotels or stores that are suffering the most as Europeans avoid leaving their homes.
The Bank of England took that step Wednesday, introducing a program that provides commercial banks with incentives to lend to small and medium-size enterprises.
“None of these monetary measures will stop the spread of the virus,” Mr. Hense said in a note to clients Tuesday. “But they are among the best measures to prevent the economic damage being even more severe.”
Give banks a break
The European Central Bank could use its power over bank regulation to temporarily reduce restrictions on capital — how much of banks’ own money vs. borrowed money they are required to use when doing business. That would give commercial banks more leeway to issue loans.
The Bank of England adopted this strategy Wednesday, allowing British banks to deploy capital they are required to keep on hand for emergencies.
Of course, the reason the restrictions on capital exist is to prevent banks from taking too much risk and getting into trouble in a crisis. That’s a chance worth taking, argues Ignazio Angeloni, a former high-ranking official at the European Central Bank.
“Normally, supervisory forbearance is bad,” he wrote on the website of OMFIF, a research organization. “But this is not a normal situation.”
Something off the wall
There is a remote chance that the European Central Bank will surprise markets with some new measure. For example, the bank could deploy so-called helicopter money. It could print money and distribute it directly to Europeans to avert a depression. Such a shocking departure from precedent is highly unlikely unless the situation gets much worse.
Nothing at all
A faction on the central bank’s Governing Council argues that monetary policy has already gone too far, that a decade of very cheap money has fueled asset bubbles and set the stage for a financial crisis. Some members of the council may resist taking further action until it’s clearer how widespread the economic damage from the coronavirus will be.
Doing nothing is probably not a realistic option. If Ms. Lagarde appears Thursday and says only that the European Central Bank is monitoring the situation closely and will announce policy moves when it meets again at the end of April, the disappointment in financial markets could be profound.