Interview with La Repubblica
Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Tonia Mastrobuoni and published on 11 May 2020
11 May 2020
The German Constitutional Court said that the ECB's public sector purchase programme (PSPP) is partly unconstitutional. Do you think this verdict could hamper the ECB's actions? Some commentators are suggesting the “whatever it takes” effect could be gone now?
The ECB is a European institution, meaning that the European Court of Justice has exclusive jurisdiction over the ECB and its actions. It ruled in 2018 that the PSPP is legal. As stressed by the ECB’s President, we are undeterred in our willingness and ability to act. We will continue to conduct the PSPP and the pandemic emergency purchase programme (PEPP), as well as our other monetary policy measures, in line with our mandate. This message also seems to have been well-understood by market participants.
Is it dangerous if a national court declares a verdict of Europe’s highest court to be “ultra vires”, or illegitimate? Isn't this a sort of nationalism that could undermine the European institutions and even endanger the eurozone?
It is not for me to judge the legal aspects of the verdict, but its implications can clearly go beyond the ECB. The primacy of EU law is key for the functioning of the European Union.
The ECB foresees a very strong contraction of the eurozone economy in the worst-case scenario; up to 12% for this year. Christine Lagarde spoke of an economic contraction of a magnitude and speed that is unprecedented in recent history. Inflation is also weakening rapidly, as you said in the last bulletin. So why did the ECB last week focus mainly on helping banks instead of increasing its coronavirus stimulus programme?
Yes, we are indeed facing a very deep economic crisis, on top of a humanitarian crisis, which has hit Italy particularly hard. The ECB has responded forcefully and swiftly in order to mitigate the economic and financial fallout from the crisis. We have adopted a very broad set of measures, including additional asset purchases under the asset purchase programme (APP) and under the new PEPP. The PEPP gives us ample flexibility to allocate our purchases across time, asset classes and jurisdictions. We are using this flexibility to make sure that our monetary policy is transmitted to all euro area countries. And we stand ready to adjust the size and duration of the programme if needed.
But the euro area economy is largely bank-based, also in Italy where small and medium-sized enterprises (SMEs) play an important role. SMEs typically rely heavily on bank funding. Measures directed at the banking sector are therefore a crucial element of our policy package. They directly support lending to the real economy. This is why we are offering liquidity to banks at very favourable rates. And we have significantly eased collateral requirements, also by freezing collateral eligibility in the event of rating downgrades, so that banks can make full use of our operations. As a package, these measures reinforce each other and support both European households and firms in these very difficult times.
What do you expect now from the banks, after the decisions you took at the last Governing Council meeting?
We have seen a strong increase in bank lending in March. This is partly related to credit lines being drawn down, particularly by companies that are facing a dramatic drop in their revenues. Some companies are also drawing down their credit lines for precautionary reasons. Our operations ensure that banks have the necessary liquidity to meet this demand. And they provide strong incentives for banks to extend credit to the real economy.
Take our targeted longer-term refinancing operations (TLTROs): In these operations, a bank only gets the most favourable rates if it meets a certain lending target. Then rates can be as low as 50 basis points below our lowest policy rate, the deposit facility rate, which is currently at -0.5%. Due to this favourable pricing, we expect a large take-up in these operations.
In addition, we introduced a new set of operations last week – the pandemic emergency longer-term refinancing operations, or PELTROs. They complement the TLTROs by effectively providing a liquidity backstop for banks, at still favourable rates. They can be used by banks that specialise in lending that is not eligible for our TLTROs, like real estate lending or lending to public entities, or by banks that have exhausted their limits under the TLTROs.
The United States have made a much bigger effort than Europe. The Federal Reserve will be buying unlimited bonds and now even junk bonds. Donald Trump has said that he will invest USD 2 trillion to help the economy recover from the crisis. Are the ECB and Europe doing too little, and maybe also too late?
The ECB’s measures form a powerful package. We acted swiftly and decisively, also because we already had a broad-based and flexible toolkit at our disposal. We could rapidly scale up our measures, for example by expanding our purchases of commercial paper, or by adjusting our operations with banks. Overall, the impact of our measures is substantial. And we will expand all of our measures further if and when warranted.
On the fiscal side, there have been a number of important measures at national level. Many Member States, including Italy, have implemented sizeable packages to mitigate the impact of the crisis. There has also been good progress at the European level. The policy package that is currently under preparation – including the SURE instrument for the unemployed, the European Investment Bank (EIB) guarantee fund, and the Pandemic Crisis Support for sovereigns under the European Stability Mechanism (ESM) – is an important first step. But most observers would agree that more is needed. The recovery fund will be a central element in these discussions. I hope that a consensus on an effective fiscal response at European level can be reached that is commensurate to the challenges we are facing today.
Going back again to last week: it's predictable, given the fact that corporate debts, but of course also government debts, are rising everywhere, that some might be downgraded. Some started already with Italy, which is at this moment a country to look at. Why didn't the ECB follow the Federal Reserve's decision to also buy junk bonds for the APP and PEPP and so on?
We are well aware that rating downgrades may pose a risk to our policy transmission. Under the PEPP we are already buying Greek government bonds even though these bonds do not meet our usual minimum rating requirements. This decision reflects the unprecedented severity of this crisis. So far, we have dealt with the issue of rating downgrades only in the context of our collateral framework. We have not yet discussed the impact of potential rating downgrades on our purchase programmes.
There is a question often coming up in Germany about the danger of interest rates remaining negative for too long. You have been observing the effect this is having on banks for some time. What are your findings?
Interest rates are not under the full control of central banks. This fact is often ignored in public debates. There are fundamental macroeconomic trends that have caused a gradual but persistent fall in what we call the “natural” – or “equilibrium” – real interest rate. Monetary policy cannot reverse these broad macroeconomic trends. The implication, however, is that in order to stimulate the economy, negative rates are necessary. Raising rates would have a disastrous effect on the economy.
And, overall, our conclusion is that the impact of negative rates on bank profitability is much less significant than what the discussion would suggest. There are, in fact, many other structural factors that lie within the remit of banks that weigh on bank profitability.
There is a very typical accusation that comes from Germany, and it is also in Karlsruhe’s verdict: the ECB is doing economic policy and not monetary policy.
From an academic point of view, the distinction between monetary policy and economic policy is difficult. But their objectives are clearly different. And I can assure you that the ECB is always assessing very carefully that our measures are suitable, necessary and proportionate.
Going back to a much-quoted sentence of President Christine Lagarde that caused so much discussion and also a lot of reaction in the markets, may I ask you if the ECB is there to close spreads?
The ECB has to ensure that its monetary policy reaches all parts of the euro area. A divergence of spreads is often a sign of fragmentation, and such fragmentation hampers the smooth transmission of our monetary policy. We are committed to countering such fragmentation with appropriate policy measures. And the PEPP is the right policy tool in this respect. It prevents self-reinforcing spirals and fire sales in sovereign debt markets.
Some feel now that, given the huge difference in the size of stimulus packages – Germany’s huge package is a multiple of the packages of France or Italy –, the gaps between European countries might be even bigger after the crisis.
Only very recently, Germany was accused of spending too little. So we should be happy that Germany is no longer sticking to the “black zero” during the current crisis. This will have beneficial effects for the euro area as a whole. But I agree that the point you raise in your question is important. There is a risk of an even stronger divergence in economic developments, mainly for two reasons.
First, even though this is an economic shock that has hit every country, some have been hit more strongly than others. Italy is certainly one country that has been hit particularly hard, both in terms of the human suffering and the economic consequences caused by the pandemic.
Second, the fiscal capacity of individual Member States to respond to the crisis differs widely. It would be harmful if those countries that are hit the hardest spend the least to fight the crisis. Such an outcome has to be avoided. This is why an adequate European response is so important. The strong economic linkages within the euro area imply that the well-being of one country matters for all the others. So this is not only about solidarity, it is also about self-interest. We are all sitting in the same boat. If we have a leak, the entire boat will go under. We must not allow that to happen – and the best way to do this is through coordinated efforts at European level.
Italy and other countries have signed a letter insisting on coronabonds. Do you think they are right on insisting on this?
Political sensitivities are a fact of life. In Germany, but also in other countries, the concern rests mostly with the idea of debt mutualisation. This is why a “coronabond” is controversial. But my feeling is that there is a widespread willingness to find a common European response. Policymakers just have to identify the right fiscal instruments. Germany and other Northern countries believe that debt mutualisation would ultimately require shifting more decision-making powers to the European level.
You mean on fiscal policy?
Yes. If, in the medium-term and going beyond the current crisis, one wants to move towards a system with more debt mutualisation, one may also have to move towards a governance structure with more fiscal decision-making power at the European level.
On the recovery fund, there is a discussion that basically comes down to the questions if it should give credits or transfers. And countries like Italy are insisting on transfers because they can’t risk a too high debt.
There is a clear risk of a debt overhang in the aftermath of the crisis – not just in the public sector, but also in the private sector. Most public initiatives for the private sector primarily focus on loans or loan guarantees. But this approach risks undermining investment incentives in the future. So it is not clear whether responding to this crisis with debt alone is the right way to go. The European Commission has started thinking about how it could instead provide equity-type funding.
For the public sector, we will need a mixture of loans and grants to deal with the economic fallout from the crisis. And the best way to reduce the public debt burden after the crisis is to strengthen economic growth. This is the reason why the recovery fund is so important. It has to be ensured that this fund supports investments that foster economic growth in the future.
Some populists in Italy say; if we request access to the ESM, we will have the troika one day or another. How do you respond to this? And how is this linked to the Outright Monetary Transactions (OMTs)?
The current proposal foresees that accessing ESM funds today will not lead to an economic adjustment programme tomorrow. I fully understand that there are fears of austerity. This is certainly not what is needed at the current juncture. This has been well-understood by European leaders.
As regards the link to OMTs, their use requires an ESM programme. A second important point is that there is no automatic link between a country asking for an ESM programme and the activation of OMTs. The latter is a decision by the ECB’s Governing Council. For now, we have deliberately decided to implement a new purchase programme, the PEPP, that is tailor-made for this particular type of emergency. This programme has an ample degree of embedded flexibility, and it is the right tool to deal with the current crisis. OMTs were designed for a different type of crisis, but they remain an important part of our toolbox.
A last question: there is a request for debt monetisation among certain populist parties, and this is also an argument against the ECB. Maybe it would be even stronger after Karlsruhe. How do you respond to these requests?
The Treaty does not allow for debt monetisation. The prohibition of monetary financing is an important safeguard to protect the long-term stability of the currency and the purchasing power of citizens. History teaches us that we should guard this aspect carefully.
But we have to do a better job at explaining how European citizens benefit from being part of the euro area. We have eliminated exchange rate risk within the euro area, and the euro is a very successful currency: it is stable and internationally accepted. The euro also gives countries a monetary policy sovereignty that many did not have before. And the euro enjoys wide popularity in euro area countries, including in Italy. We should work hard on preserving and fostering this popularity, not only by designing the right policies, but also by explaining that the euro is beneficial for all citizens of the euro area. I am deeply committed to contributing to these objectives.