(Bloomberg) -- Governments and central banks face a tricky balance between shocking the economy if they end pandemic support too soon, and undermining it if they keep measures in place too long, according to a European Central Bank report.
Noting the sheer scale of the fiscal, monetary and regulatory support, it said the effort has been “vital” in helping companies and households withstand the crisis. It said the three prongs of support are intertwined, making their withdrawal a complex task.
“Ending measures abruptly could lead to cliff effects on households’ and corporates’ income, with knock-on effects for economic activity in 2021,” the researchers wrote in the pre-released article from the ECB’s Financial Stability Review, due Wednesday. “The simultaneous termination of policy measures could trigger a protracted downward shift in the recovery path.”
Yet keeping measures in place even as economic stress fades will diminish their effectiveness, leading to capital mis-allocation and preserving non-viable companies.
“Exiting from the extraordinary support should be timed carefully, given the very sizable cliff effects for the economy and the banking sector, and the interactions between the monetary, fiscal and prudential policies,” the researchers wrote. “There are substantial short-term risks associated with the withdrawal of policy support, while medium-term risks of protracted policy support should not be ignored.”
The ECB intends to bolster its monetary stimulus in December, while its bank supervision arm has given relief to lenders. European Union leaders are meanwhile embroiled in a standoff over their joint spending package to fund the recovery in coming years.