The fall in euro-zone potential growth after the COVID crisis will complicate the ECB’s task

The euro zone’s (real) potential growth was already low before the COVID crisis. It risks being very low after this crisis (due to the loss of productive capital, the loss of human capital and the proliferation of zombie firms). If real growth in the euro zone becomes very low and barely positive, then for monetary policy to retain an expansionary bias, real long-term interest rates would have to be even lower than growth, i.e. negative. Given debt ratios, it is likely that euro-zone monetary policy will retain an expansionary bias. For it to remain as expansionary as over the period 2014-2019, real long-term interest rates would have to be around -1.5%, i.e. extremely negative, and compatible only with a nominal long-term interest rate of 0%. The euro zone’s very low potential growth will therefore constitute a major policy constraint for the ECB.