UPDATE 1-Europe must be selective with COVID lockdowns, ECB says

(Adds Mersch, detail)

MADRID/FRANKFURT, Oct 30 (Reuters) - European governments must be selective in shutting down economic activity to combat the coronavirus pandemic and need to keep spending up to support businesses and families, European Central Bank policymakers said on Friday.

With coronavirus infections testing the limits of the health system, the euro zone’s biggest nations have imposed lockdown measures this week, dealing a blow to the services sector that has yet to recover from a deep recession this spring.

“We must try to defeat the virus without totally shutting down the economy because the consequences in terms of loss of economic activity are very, very intense,” ECB Vice President Luis de Guindos said.

The ECB on Thursday made clear it would ramp up stimulus in December as the lockdowns raise the prospect of a double-dip recession but policymakers also shifted the burden onto governments, arguing that the role of monetary policy is limited.

“We have to take into account the need for probably a higher amount of fiscal input in these circumstances since it’s not for monetary policy to be surgical and to extend credit to individual companies,” ECB board member Yves Mersch said. “That is a fiscal task and we have encouraged the fiscal side to expand its intervention.”

While most governments have put in place public guarantees to keep viable firms afloat, debt levels have surged and some governments are discussing becoming more selective in using taxpayers’ money.

Such caution could force banks to hold back loans, creating a credit crunch even as liquidity in the sector is at a record high.

“It’s very important that fiscal stimulus measures are phased out in step with economic recovery,” de Guindos said. “We don’t want a situation in which we quickly reduce the stimulus because that could provoke an even more intense fall.” (Reporting by Inti Landauro, Nathan Allen and Balazs Koranyi; editing by John Stonestreet and Nick Macfie)