After the Virus, Can the EU Seize Its ‘Hamilton Moment’?

As the coronavirus pandemic continues, Bloomberg Opinion will be running a series considering the long-term consequences of the crisis. This column is part of a package on monetary policy. For more, see Clive Crook on the end of central bank independence, Dan Moss on Asia’s growing influence and Mohamed El-Erian on creating a sustainable recovery.

Around the world, central banks have been forced to take dramatic action thanks to the Covid-19 pandemic. After a slow start, the European Central Bank has been one of the most ambitious. In mid-March, it adopted a wide-ranging package, including a major asset-purchase scheme with far fewer restrictions than it imposed in previous rounds.

Such a program was necessary to preserve the stability of the euro area. But it raises long-term questions about the future of monetary policy and of the euro itself. The fear is that the central bank will face excessive constraints once the outlook stabilizes and the emergency subsides.

With some prudence and forethought, however, this crisis could also offer a once-in-a-generation opportunity to undertake the reforms necessary to not only manage rising debt loads, but to place the entire European project on a firmer footing. What steps policy makers take once the immediate crisis passes will make all the difference.

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By any measure, the ECB bungled its initial response to the outbreak. As late as Feb. 21, Philip Lane, the central bank’s chief economist, was saying that he expected a “V-shaped” recovery, implying that the bank saw little need for imminent action. ECB President Christine Lagarde was the last among the chairs of the major central banks to promise intervention if needed. Then she made a serious error when she told reporters that the bank would not act to close spreads between government bonds in the monetary union. The yields of fragile countries such as Italy soared, prompting fears of a new sovereign-debt crisis.