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Author: Cillian Rossi


“Whatever it takes”. Three words that saved the single currency.

Mario Draghi’s iconic utterance – delivered to an audience of London investors in July 2012 — is  widely regarded as the turning point in the Eurozone crisis. At a time when government bond yields across the Eurozone were soaring, Mr Draghi’s assurance that the ECB would do everything within its mandate to save the euro instantly calmed financial markets. More than anything, it demonstrated that the ECB was — at last — prepared to utilise the firepower at its disposal to prevent the breakup of the Eurozone.

Of course, Mr Draghi’s words alone did not end the Eurozone crisis. But the confidence that his remarks restored in the euro project was immediate. They also demonstrated the profound influence that effective monetary policy communication can have on market behaviour. As the Eurozone faces yet another crisis — the expected economic and financial fallout from the COVID-19 outbreak — many have looked to Mr Draghi’s replacement as ECB president, Christine Lagarde, for an equally decisive intervention.

The ECB has responded to the COVID-19 crisis with two packages of monetary policy measures. The first package was announced on 12 March 2020 to an underwhelming market response. Disappointment quickly turned to panic, however, as a communication error by Ms Lagarde cast doubt on the ECB’s ability to drive down spiralling Italian borrowing costs. The ECB’s second, more ambitious package was delivered just under a week later and eased market turmoil. Ms Lagarde also sought to make amends for her earlier comments with clear and direct communication across different channels.

Communication Misstep

On 12 March 2020, the ECB’s Governing Council — comprised of the six members of the bank’s Executive Board and the governors of the 19 Eurozone national central banks — unanimously agreed a first course of action. The bank announced an expansion of its quantitative easing (QE) programme with an envelope of €120 billion in additional asset purchases by the end of 2020. The ECB also launched a new programme of cheap loans in a bid to safeguard commercial lending to small businesses. Many investors expected the bank to follow the Federal Reserve and the Bank of England by cutting key interest rates, but the ECB kept its rates unchanged.

Market reaction to the package was muted. Investor confidence in the ECB’s ability to fight the crisis was rattled, however, by comments made by Ms Lagarde in a subsequent press conference. In an uncharacteristic communication error, Ms Lagarde said that it was not the ECB’s role to “close the spread” in yields between the Eurozone’s core Member States and those at its periphery. Market panic ensued. Her comments sent yields soaring in Italy, the Member State worst hit by the COVID-19 outbreak. As borrowing costs rose, concerns about the sustainability of Italian debt resurfaced.

Doubts about EU solidarity — a familiar narrative during the Eurozone crisis — re-emerged. Ms Lagarde quickly walked back her comments, stating in a television interview less than an hour later that she was “fully committed to avoid any fragmentation in a difficult moment for the euro area.” She also acknowledged that “high spreads due to coronavirus hamper the transmission of monetary policy.” The damage was done, however, and Ms Lagarde is understood to have apologised to the ECB’s Governing Council for her error.

In a pointed reply to Ms Lagarde, Italian prime minister Giuseppe Conte said “the job of the central bank should not be to hinder but to help such measures by creating favourable financial conditions for them.” Philip Lane, the ECB’s Chief Economist, sought to reassure investors — and the Italian people — by publishing a blogpost on the bank’s website clarifying the analytical framework underlying the measures. Professor Lane affirmed that the ECB was “ready to do more” to address tensions in government bond markets, emphasising that the ECB would not tolerate any threat to the “smooth transmission” of ECB monetary policy throughout the Eurozone.

Sending the Right Message

On 18 March 2020, the ECB issued a rare public rebuttal of a Governing Council member after Austria’s central bank governor, Robert Holzmann, cautioned earlier in the week that monetary policy had reached its limits. That same day, and contrary to Professor Holzmann’s claims, the ECB announced a second, more comprehensive response to the COVID-19 crisis. Following a late-night emergency phone call, the bank’s Governing Council agreed a new programme of asset purchases amounting to €750 billion by the end of the year. Purchases of private and public sector assets under the Pandemic Emergency Purchase Programme (PEPP) will be conducted until the Governing Council judges the crisis to be over, meaning the programme may last beyond 2020.

In a significant move, the ECB opened the door to purchasing Greek debt for the first time. The bank will also consider removing self-imposed limits on the amount of bonds that it can purchase from each Member State. This would enable the bank’s purchases to target the most at-risk countries, like Italy. The announcement pulled yields down across the Eurozone— notably in Italy and Greece — reducing government borrowing costs and reversing in part the asset price volatility that followed Ms Lagarde’s communication error.

With echoes of Mr Draghi’s famous words, Ms Lagarde tweeted after the announcement: “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.” Ms Lagarde also published a blogpost on the ECB website and in The Financial Times, in which she addressed the “unbearable human tragedy” of the crisis. She also explained — in the straightforward language typical of her time as Managing Director of the IMF — how the PEPP will support “every citizen of the euro area through this extremely challenging time.” This time, the message was clear.


At a hearing in the European Parliament on 6 February 2020, Ms Lagarde said, “Good communication forms the bedrock of the ECB’s credibility and underpins our legitimacy in the eyes of the people we serve.” In her first major communication challenge as ECB President, Ms Lagarde stumbled. Markets have since calmed — for now — but the sharp fluctuations in Eurozone government bond values have undermined the bank’s credibility. Restoring legitimacy in the eyes of the Italian people will be an even greater challenge.

Ms Lagarde’s political skills will continue to be tested over the coming weeks amid reports of disharmony over the ECB’s approach to the COVID-19 crisis. The hawkish Dutch and German members of the Governing Council are reported to have expressed misgivings about the bank’s ultra-loose monetary policy measures. In the context of this apparent disunity, Ms Lagarde deserves credit for reconciling the views of the Governing Council’s hawks and doves to deliver the PEPP.

Combined with the bank’s existing QE programme, the ECB’s two COVID-19 packages will bring the total amount of asset purchases this year to more than €1.1 trillion. Impressive though this figure may be, monetary policy alone cannot solve the current crisis. The ECB’s actions have put Eurozone governments in a position to finance the programmes needed to protect vulnerable workers and businesses. The onus now rests with national governments to implement fiscal and health policy measures commensurate with the challenges presented by COVID-19.

The view expressed in this blog are those of the author, and not the IIEA.