fabio panetta : why we all need a joint european fiscal response contribution by mr fabio panetta, member of the executive board of the european central bank, published by politico on 21 april 2020. * * * the case for common european economic action in response to the coronavirus crisis has often been presented as a call for solidarity. as noble as that motivation may be, it ’ s not the only reason for governments to act together. a strong, symmetric fiscal response that offsets the economic damage from the pandemic is in the economic interest of all countries in the eurozone. the disadvantages of an asymmetric response are self - evident. in the realm of public health, if countries are forced to lift necessary public health measures ( e. g. lockdowns ) prematurely because the economic costs of containment are too high, the virus will inevitably begin to spread again and will further damage the economy. when it comes to the european economy, there ’ s a similar risk of contagion. the economies of the eurozone are tightly interlinked through supply chains, financial connections and trade relationships. as a result, a slump in a large part of the eurozone will depress growth and employment across the entire region. these dynamics were on display a decade ago during the sovereign debt crisis, but today ’ s crisis exacerbates them in two ways. first, because of the global nature of the shock, european countries cannot redirect their production to satisfy demand from the u. s. or china, as they did a decade ago. this makes member countries dependent on trade within the eurozone, which represents 45 percent of the currency area ’ s gdp. second, the amplification of the shock across supply chains will be greater this time. eurozone firms are strongly integrated into global value chains, with participation rates 60 percent higher than for u. s. or chinese firms. this integration is today three times tighter within the region than with the rest of the world. analysis by the european central bank has found that these supply chain interlinkages will multiply the economic damage of the coronavirus lockdowns. as an illustration, we estimate that an initial gdp decline of 5 percent in major eurozone economies would turn into a 7 percent fall in output for the whole area. a gdp decline of 15 percent would provoke a 20 percent loss across the eurozone. and this only considers the recessionary phase, not the subsequent phase of weak trade if the

##ity crises can jeopardise price stability over the medium term. the lender - of - last - resort function of central banks is the classic solution to the run problem for individual banks. the central bank stands ready to provide liquidity to the distressed bank at a penalty rate against adequate collateral. a credible lender - of - last - resort function can ensure that no solvent financial institution ever faces a bank run. depositors know that even if all the other depositors withdraw their funds, the liquidity needs of a solvent bank will be met by the central bank. as a result, bank runs never happen in the first place. a similar form of liquidity insurance against adequate collateral can also be useful in the case of runs to the whole banking system. a central bank commitment to provide liquidity insurance in the future alleviates expected future funding constraints, thus reducing funding risk and eliminating the possibility of systemic bank runs. the progressive lengthening of the maturity of ecb liquidity - providing operations – from six months in early 2008 to twelve months in late 2009, and to three years at the end of 2011 – can be viewed as a form of commitment to guarantee the availability of ample liquidity over a future period of time. i would argue that providing secured financing with a three - year maturity in our vltros at the end of 2011 and at the beginning of 2012 was a successful example of system - wide liquidity insurance for banks. the vltros successfully lowered interbank tensions, as shown by a steady reduction of the spread between the unsecured euribor interbank rate and the ois swap rate over the following months. standard bank lending surveys and ad hoc surveys asking banks specifically about the effectiveness of the two vltros provide further evidence that the programmes have helped to make banks ’ credit standards less tight towards both households and non - financial corporations. 6 all in all, by removing the prospects of future liquidity constraints on credit supply, this policy has avoided a major credit crunch. without the launch of the two vltros, banks in distressed regions may have been forced into a self - reinforcing fire sale of their assets, could have defaulted on their maturing obligations, or may have discontinued and withdrawn existing credit lines to companies. the ensuing restricted credit supply could have dragged the whole euro area economy further into recession and could have even led to deflationary risks. more specifically, the vltros have helped tackle financial fragmentation. recourse to these