Annual Report 2020 Contents The year at a glance 4 The year in figures 6 1 The economy was hit by the extraordinary and severe pandemic shock 8 1.1 The pandemic caused a deep economic slump 9 1.2 The euro area economy co-moved closely with the global economy 11 Box 1 The medium and long-term economic impact of COVID-19 14 1.3 The fiscal policy response to the crisis 16 1.4 Inflation declined markedly due to the drop in oil prices and the economic contraction 19 1.5 Decisive policy action kept credit and financing conditions supportive 21 2 Monetary policy: preserving favourable financing conditions 26 2.1 The ECB’s monetary policy response to the pandemic emergency provided crucial support to the economic recovery and the inflation outlook 26 2.2 Eurosystem balance sheet dynamics in challenging times 33 2.3 Financial risks associated with the PEPP and APP are mitigated through appropriate frameworks 39 Box 2 The review of the ECB’s monetary policy strategy 44 3 European financial sector: facing increased risks due to the pandemic 48 3.1 The financial stability environment in 2020 48 Box 3 The ECB and climate change 50 3.2 Macroprudential policy to mitigate banking sector procyclicality and support the economic recovery 54 3.3 Microprudential activities to ensure the soundness of individual banks 58 3.4 The ECB’s contribution to European policy initiatives 60 ECB Annual Report 2020 1 Box 4 The EU fiscal response to the crisis and the impact on the banking sector and European integration 63 4 Smooth functioning of market infrastructure and payments 66 4.1 TARGET Services 66 4.2 Oversight and the role of central bank of issue 68 4.3 Innovation and integration in market infrastructure and payments 69 Box 5 A digital euro 71 5 Efforts to support market functioning, and financial services provided to other institutions 72 5.1 Developments in market operations 72 5.2 Administration of EU borrowing and lending operations 76 5.3 Eurosystem reserve management services 77 6 More banknotes and historically low levels of counterfeiting 78 6.1 Continued high demand for euro banknotes 78 6.2 The use of cash by citizens 79 6.3 Euro banknote counterfeiting at a historically low level 81 7 Statistics 82 7.1 Strategy for reporting – reducing costs and enhancing quality 82 7.2 New and enhanced euro area statistics 83 7.3 Provision of data and statistics during the pandemic 83 Box 6 €STR compliance with IOSCO principles 84 Box 7 Review of international statistical standards 85 8 ECB research priorities 86 8.1 Activities related to COVID-19 86 8.2 Research networks 87 8.3 Conferences and publications 88 Box 8 Monitoring the economy in real time 89 9 Legal activities and duties 91 ECB Annual Report 2020 2 9.1 Jurisdiction of the Court of Justice of the European Union concerning the ECB 91 9.2 ECB opinions and cases of non-compliance 92 9.3 Compliance with the prohibition of monetary financing and privileged access 95 10 The ECB in an EU and international context 96 10.1 The ECB’s accountability 96 10.2 International relations 97 Box 9 ERM II developments 98 11 Enhancing communication and outreach 100 11.1 Communication under the pandemic 100 11.2 Communication as a two-way process: the ECB listens 101 12 Organisational resilience and governance 103 12.1 Unlocking people excellence in extraordinary circumstances 103 12.2 Meet our people 105 12.3 Strengthening integrity and governance standards 108 Annual Accounts A1 Consolidated balance sheet of the Eurosystem as at 31 December 2020 C1 Statistical section S1 ECB Annual Report 2020 3 The year at a glance The euro area economy was struck by the extraordinary and severe coronavirus (COVID-19) pandemic shock in 2020. Economic activity contracted sharply during the first half of the year as a consequence of lockdown measures and heightened risk aversion. The strong and coordinated monetary and fiscal policy reaction, combined with positive news on vaccines, helped stabilise activity in the second half of the year. Overall, euro area GDP contracted by 6.6% in 2020. Annual headline inflation declined to 0.3%, from 1.2% in 2019, in large part as a result of falling energy prices, although there were also factors relating to the pandemic. For example, sectors that were hardest hit by the crisis, such as transport and hotels, contributed to the fall in inflation during the second half of the year. The ECB substantially eased its monetary policy stance to counter the negative impact of the pandemic on the euro area economy, through a comprehensive set of measures that were recalibrated in the course of the year. This included: introducing a new, temporary, pandemic emergency purchase programme; relaxing eligibility and collateral criteria; and offering new longer-term refinancing operations. The monetary policy response was a crucial stabilising force for markets and helped to counter the serious risks posed by the pandemic to the monetary policy transmission mechanism, the outlook for the euro area economy and, ultimately, the ECB’s price stability objective. In addition, macroprudential policies focused on maintaining the flow of credit to the economy, while ECB Banking Supervision introduced microprudential measures to moderate the impact of the crisis and promote the resilience of the European banking sector. In January, the Governing Council launched a review of the ECB’s monetary policy strategy, to ensure it remains fit for purpose. The review aims to thoroughly analyse the implications of the profound changes that have occurred since the previous review in 2003. These include the persistent decline in inflation and equilibrium interest rates, and the impacts of globalisation, digitalisation and climate change. The review will consider whether and how the ECB should adjust its monetary policy strategy in response, and is expected to be concluded in the second half of 2021. The ECB is exploring all possible ways within its mandate in which it could contribute to limiting the potentially substantial economic and social consequences of climate change. This includes careful analysis across relevant policy areas, investing the ECB’s pension fund and own funds portfolios in a sustainable and responsible fashion and focusing on the carbon footprint of the ECB itself. The ECB has recently created a climate change centre in order to shape and steer its climate agenda. The Eurosystem has developed a comprehensive retail payments strategy to harness the innovative potential of digitalisation, focusing on enabling instant payments, developing a pan-European payment solution and investigating the possibility of a digital euro. A public consultation on a digital euro was launched in October 2020 to ensure that any new form of money and payments the Eurosystem may provide would retain the public’s trust. ECB Annual Report 2020 4 The ECB enhanced its communication and outreach in 2020 to meet the challenges posed by the pandemic and to better understand the economic concerns and imperatives of European citizens. It also introduced the ECB Blog. 19 posts were published in 2020, with many focusing on the ECB’s response to the crisis. The first ECB Listens event took place in October 2020, and the ECB Listens Portal received almost 4,000 comments on the monetary policy strategy. 2020 was a year of intense and urgent activity, which was conducted in close cooperation with European institutions but also with other central banks across the world to confront the immense exogenous shock faced by the global economy. The ECB played its part. Frankfurt am Main, April 2021 Christine Lagarde President ECB Annual Report 2020 5 The year in figures The economy shrank as a result of Inflation declined over the course the COVID-19 pandemic of the year -6.6% 0.3% Euro area economic activity Average inflation in the euro area fell developed unevenly in 2020 as a to 0.3% in 2020 from 1.2% in 2019, consequence of the pandemic, as price developments were also contracting sharply in the first half of strongly affected by the pandemic. the year and recovering partly in the second half. Overall, GDP fell by 6.6% compared with 2019. Lending rates for firms stabilised Extra liquidity supported the at a historical low funding of businesses and households 1.46% €2.2 trillion Lending rates for firms stabilised at a Central bank liquidity in the banking historical low of 1.46% following system increased by €2.2 trillion on decisive policy action by the ECB. account of the ECB’s measures to support funding conditions in the economy and safeguard medium-term price stability. ECB Annual Report 2020 6 Macroprudential measures taken to Rapid rise in electronic payments, address the impact of the COVID-19 but cash remains dominant pandemic 116 decisions 10% assessed In parallel with a rapid rise in the use of electronic means of payment, the The ECB encouraged and supported the number and value of banknotes in policy actions of macroprudential circulation grew by around 10%, with authorities to reduce the impact of the cash remaining the dominant method for pandemic on both the stability of the in-person retail payments in the euro financial system and the economy. area. Reduction in ECB carbon emissions Active ECB outreach on a variety of per workplace social media platforms -75% 2.8 million The ECB has reduced its carbon People interacted 2.8 million times with emissions by 75% per workplace since the ECB posts on social media. establishment of its environmental policy in 2008. ECB Annual Report 2020 7 1 The economy was hit by the extraordinary and severe pandemic shock In 2020 the global economy underwent a deep recession amid unprecedented challenges.