Today Europe committed an historic policy mistake

It was going to be the big rescue day in Europe. All eyes were on the ECB and expectations had increased that something coordinated with the EU would be announced. ECB went alone and the market is shocked. ECB boosted QE, added liquidity tools, allowing banks to breach capital pillars and offered new long-term loans. No rate cut but that was meaningless anyway, but Lagarde said that rates could go lower if deemed necessary. But the main message on the press conference from the ECB President was that an ambitious and coordinated fiscal response was needed. Here lies the policy mistake from Europe.

The COVID-19 is clearly pushing Europe into a recession full stop, but the response on the fiscal side has been embarrassing. The political crisis in Germany seems to have translated into shell-shocked German politicians afraid of committing themselves 100% to the European project. Despite cheap talk from Merkel about doing ‘whatever is necessary’ and drop the balanced budget principle the market has descended into something like a tailspin with terrible liquidity in bond markets and especially the corporate bond market. Equity markets in Europe are down 10%. What is needed?