• ECB increases COVID-19 asset purchases to €1.3 trillion
  • Inflation expected to be 0.3% in 2020 and 0.8% in 2021 
  • GDP expected to fall by 8.7% in 2020
  • Pandemic responses threaten European Union stability
  • Brexit trade talks see "no real progress"

The euro area economies, especially Italy and Spain, have been ravaged by the COVID-19 pandemic and the lockdowns to stop it. The European Central Bank just announced it will be expanding its Pandemic Emergency Purchase Programme (PEPP) by €600 billion to a total of €1,350 billion and kept interest rates unchanged. This is €100 billion more than investors were expecting. The duration of PEPP has also been extended to at least the end of June 2021 and purchases will continue "until it judges that the coronavirus crisis phase is over." The central bank has ramped up its other bond-buying programs and usual lending to banks by €630 billion since March, according to Pantheon Macroeconomics. 

The European Central Bank also said headline inflation was expected to be 0.3% in 2020 and 0.8% in 2021 — well below the bank’s mandate to drive inflation “close but below 2%”. GDP is expected to decline by 8.7% this year, before rebounding to 5.2% growth in 2021 and 3.3% in 2022. ECB President Lagarde last week ruled out the "mild" scenario (5% GDP decline) for 2020 and said we're likely to see output reduce according to the "medium" or "severe" scenarios (8-12% decline).

EU GDP
Source: Eurostat.

The pandemic poses a unique threat to the European Union and the Eurozone. A recovery fund proposed by the executive branch of the EU is being opposed by certain less-affected, "frugal" countries that don't want to share debt or give grants to the needy ones instead of loans. The ECB's bond-buying program faced flak from Germany's highest court last month. It demanded that the German government and central bank force the ECB to prove it is necessary and does not violate the principle of proportionality (weighing the costs and benefits). While it has no jurisdiction over the ECB, the court can affect the Bundesbank's participation. It can also inspire other nation's judiciaries in the euro area to question the ECB's credibility in a similar way. 

Brexit trade talks aren't going so well. The two regions have until the end of the year to strike a new deal, and U.K. Prime Minister Boris Johnson is under pressure to extend the deadline. According to Germany’s ambassador to the EU, Michael Clauss, negotiators have made "no real progress." "Is a deal possible? Yes, definitely," he said at a European Policy Centre event yesterday. "But I think it also means that the U.K. needs to have a more realistic approach. To put it short: I think we cannot have full sovereignty and at the same time full access to the internal market. So this Brexit issue is going to absorb a lot of political or most of the political attention we expect in September and October." A current big issue being discussed is fish quota i.e. whether European companies can access U.K. waters to fish.