Interview with the Telegraaf
Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Dorinde Meuzelaar and Martin Visser on 8 May 2020 and published on 12 May 2020
12 May 2020
How serious are the consequences of the coronavirus (COVID-19) for the economy?
Uncertainty is the key word. Our scenarios factor in a contraction of between 5 and 12 percent. We are now in the trough, but I expect the data to improve over the summer, even though people have now accepted that the virus will continue for some time: restaurants are reopening, but with fewer tables; factories are starting up again, but with lower production. We also need to ask what consumers will do: those who have, say, just lost their jobs will consume less for the time-being. So whether we return to the situation before the crisis or whether there will be a permanent effect is still uncertain.
Are governments doing enough?
Governments and the central bank hold different responsibilities. The ECB must ensure that there is ample liquidity. We also know from previous crises that markets freeze, so we must make sure that funds are available and that the markets stabilise. Governments have a different task: they for example address the harm to workers from losing their jobs by topping up their incomes.
Do all euro area countries have enough fiscal space for such stimulus measures?
There is no doubt that some countries entered into this crisis with larger buffers than others. What is most important is not whether all countries are doing as much as each other, but whether each country is doing enough. An insufficient fiscal response by any country would make the shock worse. There is enough scope: the European Commission relaxed the standards set under the Stability and Growth Pact for that reason. And there is a spillover effect. If strong countries do more, the whole of Europe benefits. If Germany starts performing strongly again, for example, it would also step up its imports from the rest of Europe.
Are you not concerned that the sovereign debt of a country such as Italy is reaching dangerously high levels?
Many countries will see a rise in their debt, even by 20 or more percentage points. But you also have to look at the overall picture. As shown by the examples of China and Japan that also saw their debt levels surge, if the bulk of that debt is held by households in their own countries, a high public debt does not generate external economic pressure. Today, the increase in debt in Europe is largely owed to European households: that is a completely different situation to what we saw in the euro area 12 years ago, when the debt was held by foreign creditors: debts then start to weigh on the economy, generating instability. So, from a European perspective, it’s important to take a broader view of debt issuance that takes into account whether the debt is owed to European investors or global investors. Interest rates are important, too. Debt has a completely different impact on an economy when the prevailing interest rate is four percent than when it is zero percent. Interest rates have been falling globally for many years now, for example because of demographic ageing and other sources of high saving rates.
But isn’t the ECB itself seeking to keep interest rates low through its pandemic emergency purchase programme?
Yes, indeed. But compared with other factors, the central bank plays a modest role. Owing to the high supply of savings compared to the limited investment demand, the real interest rate stands at zero percent.
Aren’t you being too modest about your role? Were it not for the ECB’s purchases, the spread between Italian and German government bond yields would be far higher.
Those differences are always there. When a crisis occurs, investors flee to the safest and most liquid assets, namely to German Bunds. So even if there is no change at all in the fundamental factors, such as the public debt or the public deficit, yield spreads widen during times of crisis. If investors know that the central bank is present in the market, this acts as a stabilising force: investors will be less inclined to run towards the safe haven of the bund market: when we stabilise markets, spreads narrow due to the containment of such non-fundamental forces.
But the ECB also purchased bonds when the eurozone economy was performing really well. Might you be taking the stabilising role a little too seriously?
There is a difference between the pandemic emergency purchase programme and the programme of quantitative easing that we embarked on in 2015. The latter came about because inflation was falling short of our objective. We now need a programme on top of that to stabilise the economy and return to the “normal” situation.
Is the policy of asset purchases proportionate? The German Federal Constitutional Court ruled that the ECB does not sufficiently consider the negative side effects.
When we started the asset purchase programme in 2015, there was a risk of deflation. Our first step was to ensure that inflation did not enter into a downward spiral. Inflation is still below our objective, but we have always said that we would remain prudent and patient. We don’t want to purchase debt to an extent that would distort the functioning of the financial markets. We only buy a monthly amount that is fixed in advance and we will stop as soon as the inflation aim is reached. For me that means that the purchase programme is proportionate.
Political controversy has arisen about the joint issuance of “coronabonds”. What is your view on that?
That is up to the Member States themselves. But the evidence indicates that there would be strong demand for them among global investors. Moreover, the debate is an entirely different one to that at the time of the euro debt crisis. The focus was then on the joint refinancing of existing debts, whereas it now centres on the joint issuance of the new debt needed in order to tackle this shock, which is affecting all countries. If some countries cannot do enough to counter the virus, the entire EU suffers as a result. For many countries, coronabonds would be a cheaper source of financing.
But what advantage would that have for the Netherlands?
In the long term, I think that this would result in greater prosperity across the eurozone. That would be good for the Netherlands too.