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INTERVIEW

Interview with Perspektiven der Wirtschaftspolitik

Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Karen Horn

27 May 2020

In its ruling on the ECB’s public sector purchase programme (PSPP)[1] pronounced on 5 May, the German Federal Constitutional Court in Karlsruhe found that these asset purchases were partly unconstitutional and that the European Court of Justice (ECJ), in assessing the programme’s proportionality, had failed to satisfy the requirements of a comprehensible review of the ECB’s observance of its monetary policy mandate. What is your view on that and what are its consequences for the ECB?

The ruling is solely addressed to the German Federal Government and the Bundestag, which are now required to use their influence to bring about a proportionality assessment by the ECB of its asset purchases. That is problematic for two reasons: first, the ECJ, which has jurisdiction over the ECB, ruled that the PSPP was compatible with EU law. Second, under Article 130 of the Treaty on the Functioning of the EU, the ECB is an independent institution and does not follow the instructions of national authorities. The ECJ’s ruling remains definitive for us and there is therefore no necessity to change our monetary policy. It is good news that the new asset purchase programme – the pandemic emergency purchase programme, or PEPP for short, which we launched in response to the current coronavirus (COVID-19) pandemic – is not affected by the Karlsruhe ruling. Market developments show that, despite initial uncertainty, market participants share this perception. So we will continue to do what is necessary to fulfil our price stability mandate and ensure transmission of the common monetary policy across the whole euro area. At the same time, what happens in Germany, the largest country in the euro area, is of course important for us.

The Deutsche Bundesbank is more directly affected than the ECB; if the set deadline is not met, it must ensure that the government bonds already purchased under the PSPP are sold on the basis of a – possibly long-term – coordinated strategy.

Yes, the ruling explicitly mentions a period of three months. Under the Constitutional Court ruling, if the proof of proportionality required by the Constitutional Court has not been provided within that time, the Bundesbank would no longer be able to participate in asset purchases under the PSPP. I am confident that such a situation can be avoided. It should be noted that when preparing, deciding on and implementing the PSPP and its other monetary policy measures, the ECB has always analysed their effects and side effects and weighed them up against each other. There are scores of documents in this regard, many of which, such as the accounts of the monetary policy meetings of the Governing Council, are publicly available. Such documents were provided to the ECJ by the ECB in the course of the legal proceedings and are sure to have been taken into consideration in the legal assessment.

But there is still no disclosure of the actual minutes.

We publish monetary policy accounts, which are slightly condensed versions of the minutes.[2] These accounts are very detailed. You can learn a great deal from them about the Governing Council’s discussions. They exemplify our transparent way of working and our commitment to consistently provide a sufficient explanation of our monetary policy measures. We are also accountable to the European Parliament, which holds regular hearings about monetary policy (referred to as the monetary policy dialogue). During these hearings, the ECB President answers questions on monetary policy from Members of the European Parliament. This exchange is broadcast live online and is recorded in published transcripts, which also goes to show that an assessment of the effects and side effects of our monetary policy decisions is made on a regular basis.

The assessment takes place, and it is feasible to present the documentation in a way that makes the assessment comprehensible for the courts. Does that mean that the ruling was exaggerated?

That’s not for me to judge. But the legal assumptions underlying the ruling reach beyond the actual case of the PSPP, because the main issue is the general relation between EU law and national law. The primacy of EU law is a fundamental principle of the European Union. It would be extremely important for the ECJ and the Constitutional Court to find a common understanding and work together cooperatively.

When the ruling was pronounced on 5 May, the newsreader of the German news programme “Heute Journal” said that it had to do with €2,600 billion in borrowings that the ECB had pumped into circulation in the years from 2014 to 2018, thereby depriving savers of their interest earnings. This narrative of the purported expropriation of savers, which the complainants carried forward and which the Constitutional Court partly adopted in its ruling, is evidently gaining ground. You’re surely not happy about that?

I’ve been concerned about the topic of false narratives about the ECB's monetary policy for a long time now. A central bank can obviously not make itself immune to criticism simply because it is independent. Quite the contrary. But I am concerned that, especially in Germany, these narratives of the expropriation of savers, punitive interest rates, a glut of liquidity, threatening inflation and zombie firms have developed and taken hold, despite numerous facts in support of another perspective. These narratives are repeatedly recycled by the media and therefore reinforced. We know that constant dripping wears away the stone. If people hear something often enough, there comes a point when they start to believe it. That was actually why in February I devoted my first major speech[3] in my new position to exactly this topic, interestingly in Karlsruhe of all places.

Not at the Constitutional Court, though, but at the Karlsruhe Legal Research Society.

Yes, there were even a number of federal judges in attendance but no one from the Constitutional Court. In my view, these narratives, which I attempted to refute in Karlsruhe, have found their way into the Constitutional Court’s ruling without being challenged. My speech was not just about me taking a different view. Together with ECB staff members, I made a concerted effort to go through each of the narratives in detail and draw on data and empirical research, and I demonstrated where the fallacies arose. One or two of the points may of course be open to debate, but we should use facts to rebut the arguments.

So where do the fallacies appear?

On many points, the evidence is quite overwhelming, so most of the narratives cannot be sustained. For a start, many people fail to understand why interest rates are so low. Contrary to the prevailing narrative, the low interest rates are not primarily caused by the central bank. Structural macroeconomic trends, such as demographics and the development of a society’s capacity to innovate, which affect macroeconomic investment and savings, are of far more importance. They determine what is known as the real equilibrium rate, which central banks have to be guided by. That is the rate that emerges when all factors of production are at full capacity and exert no inflationary pressure.

And these sources of growth have declined.

Exactly. The working-age population in the euro area is decreasing. And whereas in the 1980s annual productivity growth in the euro area still hovered around 2% on average, it is now slightly less than half of that. If the real equilibrium rate is very low or even negative, interest rate policy can bump against the effective zero lower bound. That is why central banks, including the ECB, generally turn to unconventional measures when short-term interest rates are at very low levels, especially as extremely low, and in part even negative, rates of inflation began to appear in the euro area as of 2014. Over the past few years, the package of monetary policy measures has considerably stimulated the euro area economy. The cost of credit for firms and households has declined markedly – and indeed to a greater extent than could have been expected solely from the lowering of the key interest rates. That revived the demand for loans, thereby supporting investment and the creation of new jobs. Without those measures, two million fewer people would have been in work in the euro area in 2019, while gross domestic product would have been between 2.5% and 3.0% lower.

In your speech in Karlsruhe you also pointed out that the narrative of the expropriation of German savers was faulty alone on the grounds that there is no entitlement to high interest rates on savings and because it is not part of the ECB’s mandate to ensure returns for savers.

Yes, and, first and foremost, some people tend to take an overly negative view of the effect of low interest rates and to overestimate it. The average real interest rate that has been earned on savings and demand deposits in Germany since the introduction of the euro is approximately the same as the equivalent average rate over the preceding 24 years. Moreover, Germany consists not only of savers, but also of borrowers, taxpayers, home owners and workers. Looking purely at the interest account for a representative German household over the period from 2007 to 2017, there is even a small plus on the bottom line. Precisely the middle income group, which is the group with the most borrowers, has benefited from the low interest rate policy.

And you don’t share the concern that low interest rates keep firms in operation that would have had to fold under normal circumstances?

This concern is not supported by empirical research. The data simply show no trace of a systematic increase in the number of unprofitable firms during the years of expansionary monetary policy. On the contrary, that number has actually declined. More favourable financing conditions benefit all firms, but most of all profitable, healthy firms, to whom banks are more willing to provide favourable loans than they are to unprofitable and highly indebted ones. So this narrative does not hold up either to a closer scrutiny of the economic interconnections and empirical research. But, at the end of the day, these substantive considerations may not be the key issue at all.

But rather?

Procedures presumably take centre stage. They can always be improved, thereby enhancing transparency for example. We indeed set great store on transparency: we already make every effort to more clearly explain what we do by posting short video clips, explainers and other such items on the ECB’s website or on Twitter. A stated objective of ECB President Christine Lagarde is to improve communication – not only with the financial markets, but also with European citizens. However, the great importance lent to these misleading narratives in practice shows us that central banks have evidently not yet succeeded in communicating directly and efficiently with the public. We need to do that in a much better way; the speech I gave in Karlsruhe was a first attempt to do so. In that respect, the Constitutional Court’s ruling has spurred us on: we want our monetary policy to be understood and, most of all, we want people to realise that we are doing something of benefit to them. But the story that is being told in Germany is the exact opposite: the ECB’s policies benefit other people, but definitely not the Germans. That is a dangerous misperception considering the extent to which Germany in particular has benefited from the euro. I want to try to correct that impression.

Against the backdrop of the ruling, isn’t it now, more than ever, time to say goodbye to the idea that the ECB can, as it were, fix everything? How strong is the other arm of economic policy, fiscal policy? What needs to be done for monetary and fiscal policy to work more in tandem?

Monetary policy is more effective if it is supported by a corresponding fiscal policy. I have the impression that this has been very well understood in the current crisis. Everyone appears to realise that with a shock as severe as the one we are currently experiencing, fiscal policy has to come into action and monetary policy cannot resolve the crisis on its own. But not all countries have the same options. Indeed, many of the countries that took a harder blow are precisely those that have less fiscal space available. That’s why there is a concern that too little is being done in these countries to overcome the crisis. Not only does that present a problem for developments in the countries concerned, it also has spillover effects throughout Europe. It could result in economic divergence among the Member States, which would impede the transmission of monetary policy to all parts of the euro area. Moreover, the EU Member States are so closely interconnected that weak developments in some Member States would also impair the others. So it’s imperative to act in a European spirit to resolve the crisis.

If Germany is doing well while other countries are doing badly, Germany suffers too.

Exactly. And so we now have to do all we can to prevent the crisis from further widening the existing divergence among Member States. That would present a major problem for monetary policy, but of course also for European integration and solidarity. That’s why the European initiatives are so important; they can help ensure that all Member States do what is necessary to overcome the crisis. We are now undergoing the most severe crisis since the Great Depression, and it can’t be ruled out that the overall outcome in some countries will eventually be even worse than at that time. On the one hand, that calls for solidarity. Within the EU, we must mutually support each other in this serious crisis. But on the other, also in the individual Member States’ own interests, it requires a European response.

However, the crisis is hitting the EU at the worst conceivable time. There is less harmony between Member States than before, the institutions in Brussels seem to be weakened, and the ECB not only has to contend with a court ruling from Karlsruhe, but also with the fact that its own toolkit has shrunk and it is reliant on unconventional monetary policies.

I don’t share that view. The ECB’s monetary policy response to the crisis was extremely swift and decisive, for one because we had learned a great deal from the previous crises, the financial crisis of 2008 and the subsequent euro debt crisis, and had already garnered experience in using new monetary policy instruments. We were able to very quickly adjust the toolkit to the current crisis and we rapidly understood the nature of the crisis we were dealing with. I wouldn’t underestimate that. On a national level, fiscal policy also swung quickly into action in many countries. Who would have thought it possible in Germany for this tremendous programme to be conjured up at such speed from thin air? Things are happening at European level too. The three core components of the support programme – the labour market programme SURE, the guarantee fund through the European Investment Bank and a special programme with limited conditionality under the European Stability Mechanism (ESM) – have largely been finalised. The most recent Franco-German initiative to design the planned recovery fund is also very encouraging, and I am eagerly awaiting the European Commission’s forthcoming proposal. This fund is especially important as it will be geared to the future and will not only help countries to overcome the acute economic shock, but also to subsequently find their way back to a sustainable reform-oriented path. Such decisions always take a little longer in Europe because of the complex nature of our governance. But I warmly welcome the current developments, even if we have not yet reached our goal.

The ECB launched an initial package of measures on 12 March followed by a second large package on 18 March that centres on the PEPP referred to earlier. To what extent were these measures driven by events in Italy and the concern that Italy could run into difficulties that would result in a disaster for the whole euro area? Italy has indeed been a cause of concern since the financial crisis.

Italy was not our concern. Our monetary policy is geared to the whole euro area. There was severe financial market turbulence in the period from 12 March, the date of our first monetary policy package, to 18 March, when we announced the PEPP. Equity prices continued to fall, the spreads on risk premia for government bonds widened noticeably and market liquidity dried up. You could observe the financial market data deteriorating by the second. The ensuing risks to growth, employment and price developments were considerable. We therefore responded with a new programme that was precisely tailored to this situation. PEPP calmed the markets and contained fragmentation in the euro area. You can see from many time series that a trend reversal set in exactly at the moment the ECB launched its PEPP package.

So are you satisfied with developments since then?

We succeeded in stabilising the financial markets, in cooperation with the other major central banks. All came into action at virtually the same time. Fiscal policymakers also took steps. However, the financing conditions for firms and banks are still more unfavourable than they were before the crisis. We still have higher risk premia in many segments. It would not be true to claim that we are now in a relaxed situation. That is not least a reflection of the consequences of the crisis for the real economy. The effects will be deeper and longer-lasting than originally anticipated. And the world will be a different one. At present, when drawing up economic projections we think in scenarios because the uncertainty is so large. But compared with the escalation that we saw in mid-March, the situation has calmed down markedly and the ECB’s monetary policy obviously contributed to this.

There was an intense debate as to whether it would not have been better to use the ESM and to activate the programme of Outright Monetary Transactions (OMTs) – even if only because going through the ESM would have ensured at least partial democratic control. What do you see as the decisive difference, and what is the relative advantage of the solution that was chosen instead?

The OMT programme was developed against the backdrop of the specific crisis situation in 2012. It was intended for a situation in which, in one or more Member States, self-fulfilling and self-reinforcing market dynamics arise that are beyond their control, putting the state concerned under fiscal pressure, even though it is still solvent and could continue to access market funding. This could be observed during the euro debt crisis. That is why individual Member States were given loans through the European Financial Stability Facility and later through the ESM under conditions (referred to as conditionality) that seek to ensure that the states carry out structural reforms, flanked by monetary policy. However, the OMTs did not need to be used at the time because their announcement in itself was enough to stabilise the markets. Our current situation is a completely different one. The shock has hit all countries, out of the blue, through no fault of their own. We have no significant moral hazard issue and so the incentives that are attached to support are not a priority. Conditionality is not required in the same way. The Stability and Growth Pact has been put on hold for the moment and a programme with deliberately weaker conditionality has been agreed on at the ESM. There’s a general understanding that this type of crisis is completely different from the euro debt crisis. For our monetary policy too, we therefore need other instruments. That is not to say that there might not be a situation in future in which the OMT is deployed – it is an important tool in our toolkit. But in our view, it is not the appropriate means for the current situation.

The ECB has taken other measures in addition to the PEPP, including relaxing collateral requirements in its credit operations. Now even Greek junk bonds can be accepted. Isn’t this a cause for concern? Aren’t you afraid that there will be a higher rate of default?

These are extraordinary times, and extraordinary times demand extraordinary measures. And that applies also to the collateral framework. Our targeted longer-term refinancing operations (TLTROs), which haven’t been talked about as much as the asset purchase programmes, are an important instrument through which we offer banks very favourable financing conditions if they continue their lending activities. The idea here is that the favourable financing conditions are passed on to borrowers, be they firms or households, thereby cushioning the crisis. At the same time, incentives are in place to encourage continued lending. But all of our loans to banks have to be backed by adequate collateral. The package of measures taken by the ECB in relation to the collateral framework aims to ensure that banks have sufficient collateral at their disposal. It is true that this has involved increasing our risk tolerance, but our risk management system helps us to assess the complicated trade-off between the effectiveness of our measures and the associated risks. And we also need to bear in mind that there are different levels when it comes to collateral. For there to be a default, the bank would first have to fail to service the loan obtained from the ECB, and then the collateral would also have to fail. The default rates can be expected to be relatively low. We have always been extremely conservative, and now we’re a bit less conservative, but the overall level of protection remains very good. And the haircuts we apply ensure that the risk is adequately accounted for: if a bank deposits collateral worth €100, it doesn’t get €100 of funding, it gets somewhat less than that, with the amount depending on the quality of the underlying collateral.

But the size of the haircut was reduced in March.

Yes, that’s true, by 20%. We decided that, on balance, there was a good case to be made for this measure. And we continue to differentiate: if an asset becomes riskier, the haircut increases. That also applies to the assets that we continue to accept as collateral even when they fall below the minimum quality level as a result of the crisis.

While we’re on the subject of banks’ default risk, it’s fair to say that they have not yet fully recovered from the financial crisis of 2008. How do you think the coronavirus crisis is likely to affect the stability of banks in the euro area?

The financial system cannot emerge unscathed from a crisis as severe as the one we are currently experiencing. And that’s why it is so important that the ECB, on the one hand, provides ample liquidity. There is always a concern that banks, particularly in times of crisis, will become very reluctant to lend and that this will exacerbate the crisis even further. The financial crisis taught us that this is to be avoided. That is exactly what the TLTROs are there for. At the same time, governments are guaranteeing loans to companies that have seen their earnings collapse in the crisis. This has reduced the default risk for banks. In addition, concessions have been made on the supervisory side. It is fortunate that we have managed to strengthen banks’ capital and liquidity in recent years – perhaps not yet sufficiently, as many believe, but at least to a notable degree. We are reaping the benefits of that now. The buffers that have been built up can now be used to prevent procyclical effects that would exacerbate the crisis. Whether the banks actually do so is, however, an open question. One could also ask whether it makes sense that aid is generally taking the form of loans, both to governments and firms. There is a risk of a debt overhang in the coming years.

What do you fear might be the consequences?

A debt overhang is dangerous because it can result in insufficient investment. The explanation for that is simple: if a company is heavily indebted, many investments are not worthwhile, because the returns go to the creditors in the first instance and too little stays within the company. If we allow a debt overhang to build up across the entire economy, it will be fatal for investment. We urgently need to think about what we can do to prevent this. Immediate thoughts turn to equity financing, where the problem does not exist to the same extent. In the case of stock corporations, preference shares could be considered. But that wouldn’t be an option for small and medium-sized companies that don’t issue stock. An international team of researchers led by Jan Krahnen has considered this kind of equity-based model.[4] Under this proposal, financial assistance provided to companies would be repaid in the form of corporate profit tax. Since taxes would only be paid by successful companies, the model would have an equity-like nature. There are questions to ask about how exactly such a scheme would be implemented, but the proposal goes broadly in the right direction. If there are too many loan defaults, that will hit the banks and destabilise the banking system. We absolutely must try to avoid a situation in which the current crisis is made even worse by a banking crisis. We have to look very carefully and draw on the lessons of previous crises which showed how important it is to react quickly and to recapitalise in good time. That said, I hope that won’t be necessary.

Mechanisms for recapitalising and resolving failing banks were put in place in the wake of the financial crisis. How well do you think they work? Will they help us now if things get tough?

That depends. In a research paper that I wrote at the University of Bonn, my two co-authors and I conducted an empirical analysis of the effects that a bank resolution framework has in the event of a severe shock, looking at whether such frameworks increase or decrease systemic risk in the banking sector.[5] We found that it is very dependent on whether the event is a system-wide shock or an isolated shock. The study shows that a system-wide shock is associated with higher systemic risk if a more comprehensive resolution framework is in place. In other words, a resolution framework, which is of course designed to stabilise the system, can in fact have a destabilising effect in the event of a systemic crisis. These findings have a certain relevance in the current situation, when we have to ask ourselves what would happen if several banks were now suddenly to get into trouble at the same time. Is it realistic that we would restructure or resolve several banks at the same time in the depths of a severe crisis? It’s hard enough in normal times. And at least then it has a stabilising effect. But in times of crisis it may have the opposite effect.

That’s not very reassuring.

There is certainly a need to consider how to approach this without causing permanent damage to the resolution framework. The idea of a systemic risk exception is a useful one – in other words, greater room for manoeuvre could be granted in a very strictly defined extreme situation. We are seeing this now in all sorts of areas, for example with the Stability and Growth Pact or the rules on state aid. Or take industrial policy. When Peter Altmaier, the German Minister for Economic Affairs, released a strategy paper just over a year ago, it caused quite a commotion. And now things will probably be done that go far beyond that.

That raises the question of an exit strategy.

Indeed, that’s a very important question. But it’s something to address in the second phase. Right now we need to look at certain things that we previously considered to be appropriate and at least question them. That shouldn’t mean burying them forever, but we do need to question whether, right now, in one of the worst crises there has ever been, they might in fact add fuel to the fire.

How far have we got with the banking union, which was supposed to make things safer? How well prepared are we in that respect for whatever may happen next?

The banking union is unfortunately not yet complete. Among many other things, there is still no European deposit insurance scheme and the privileges on banks’ sovereign exposures have not been removed. And we are now seeing growing fragmentation, not least as a result of the national guarantees that have been put in place. A bank’s solvency is increasingly dependent on the volume of guarantees available and the ability of the state issuing those guarantees to pay. So we are once again creating a direct link between the solvency of banks and of sovereigns, when one of the aims of banking union was to decouple them. In that sense, this crisis represents a backward step for the banking union in the first instance. But it also offers an opportunity, in that it underlines the need to push forward banking union and capital markets union to improve the resilience of the European financial system. We must also facilitate urgently needed structural change in the banking sector, through consolidation and cross-border mergers, to improve the profitability of banks.

There will be a lot to sort out afterwards.

The crucial question is how we manage in the end to go back to the old rules. Banking supervision, for example, is currently being very accommodative in many areas, and rightly so, but at some point we will need to make our way back to the old system. Otherwise there would be permanent damage. A great deal of work was done by many at the time to ensure that capital requirements were increased, that non-performing loans were classified as such in good time and that there was appropriate provisioning. At some point we will need to focus again on the old rules. It’s too soon to do so now, but that should still be the aim.

It’s too early now, but when will it be time?

With temporary measures, nobody knows exactly what the word “temporary” means. The time frame could turn out to be quite long. But we have to be clear that what matters right now is getting over the crisis and ensuring that the euro area doesn’t fall into a depression lasting many years, but that we get back on a path of steady growth next year and make up at least some of the losses suffered. That certainly looks likely at the moment.

There has been intense debate about whether there might after all be a need for Eurobonds. The Italian government in particular was very much in favour. In the meantime, other measures have been agreed in Brussels. Is that the end of the subject?

There will be repeated calls for Eurobonds and the topic will remain a controversial one, particularly when it comes to models involving joint liability. This is viewed with scepticism in some Member States, such as Germany and the Netherlands, which is understandable. The fundamental probem is that if liability is transferred to the European level, then the decision-making also needs to happen at the Europan level. But the proposal for a Europan recovery fund put forward by Angela Merkel and Emmanuel Macron points in that direction. Whether there will be a regular form of European debt in the future will in the long term depend on whether there is a readiness to transfer further competences and tasks in the area of fiscal policy to the European level. There is a further dimension to this topic, which is that the euro area doesn’t have a truly European safe asset. That poses a problem for monetary policy. And if we want to strengthen the international role of the euro, it doesn’t help that the market is so fragmented, with all the various different bonds, the safest of which are considered to be German bonds. At some point we will need to find an answer to this question.

So, debt mutualisation after all?

That is one option, but it’s not the only one. There have been a number of interesting ideas about how a safe European asset could be created without debt mutualisation. That could also help to loosen the bank-sovereign nexus. A safe European asset would make a lot of things easier.

What would that kind of instrument look like?

Various aspects would need to be considered in its design, such as the impact on fiscal discipline and the functioning of national bond markets, including in the context of financial stability.[6] One option would be the ESBies proposed by Marcus Brunnermeier and his co-authors.[7] This concept is based on tranching, where government bonds are put into a basket and divided into different tranches. The safest tranche is then the safe asset. Another model involves so-called E-Bonds.[8] In this case, a package of bonds is secured by ensuring that these bonds are serviced before others. That could alter the pricing structure on the financial market and thus create significant incentives. The second model may well be more realistic. Some have ruled out the first, relatively complicated model, because there is a certain underlying scepticism about securitisation structures and tranching, and bad experiences were had with securitisation during the financial crisis, particularly in the United States. I think it is still worth having an open debate. Neither model involves debt mutualisation, and for that reason it’s perhaps not a bad idea to look at them both again.

Finally, let’s talk about a specific aspect of the policy related to assets, and by that I mean “greening”, which would involve the ECB purchasing green assets. There is probably no question about the need to explicitly consider climate-related risks in macroeconomic projections, for example. But deviating from the principle of market neutrality is politically more problematic, particularly when there are other important topics, such as the pandemic, which is a risk that until recently most of us didn’t really have on our radar.

That’s true. Climate issues play a prominent role in our planned monetary policy strategy review. We’ve had to postpone our strategy review as a result of the crisis, but we will of course come back to it as soon as we can. And the subject of the pandemic should also be discussed more generally in this context. You are absolutely right that these things need to be included in our macroeconomic models. But so far this has only been done in a very rudimentary way; comprehensive models that include environmental and pandemic risks still need to be developed. That is a major aspect of the new strategy. But the idea of giving certain assets preferential treatment in our purchase programmes is an even more difficult subject. Market neutrality is indeed a fundamental principle of private sector asset purchases.

And it’s true that there are not yet that many green assets around…

Quite. If you wanted to go about it in a targeted way, you wouldn’t find all that much to buy. But it’s not without its problems. When it’s a question of buying such assets, then a lot of people are in favour. But if, for monetary policy reasons, we wanted to buy fewer such assets, or even sell them, it’s not clear that everyone would find that quite so good. One could end up in a difficult situation. We have not yet come to any conclusions about how to deal with the matter, but that doesn’t mean that a way can’t be found in the end to do so in an intelligent manner. And there are other areas, of course, where we can have an impact. With portfolios involving our own assets, for example our pension fund portfolio or our own funds portfolio, we have greater scope and we can commit to a sustainable strategy. But the sums involved are small compared with the portfolio of assets held by the ECB for monetary policy purposes, which mainly consists of government bonds. But when people talk about green assets, they usually mean private sector assets. I would add that, if more green assets are issued, we will automatically be able to buy more of them.

When it comes to buying green assets, doesn’t the ECB risk overstepping the fine line – which is so difficult to define – between monetary policy and economic policy?

That is a discussion we will have as soon as things have calmed down a little. The ECB has a very clear primary objective: price stability. We also have secondary objectives that we need to pursue, provided they don’t interfere with monetary policy. And sustainability is one of them. So the topic is certainly very important to us. That said, of course, monetary policy cannot, and should not, do everything.

If the green market is so small, then the ECB would also dominate it as a buyer.

That could happen. A taxonomy is also an important condition, to deal with the question of what green actually means. And that touches on the debate about “greenwashing”, where activities are labelled as green when they aren’t really. Some progress has been made in this area at the European level, but there is a lot more to be done in order to establish a rigorous and reliable classification. We are following this process and trying to provide impetus so that the market can develop. I have no doubt that this is the direction in which things will go in the future. It also represents an opportunity for the capital markets union in Europe. Achieving a truly European capital market, meaning one that is truly integrated, is a declared aim, but it is still a long way off. However, if something new were to emerge, for example in the area of sustainable financing, it would probably be easier to develop something European rather than trying to Europeanise existing national structures. So if efforts were to be made from the outset to design these assets in a European way, it could provide a major boost for the capital markets union. That would be very important for Europe.

[1]Ruling of the Second Senate of the Federal Constitutional Court of 5 May 2020, 2 BvR 859/15.
[2]Monetary policy accounts are available on the ECB’s website.
[3]Narratives about the ECB’s monetary policy – reality or fiction?, Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the Juristische Studiengesellschaft, Karlsruhe, 11 February 2020.
[4]Boot, A., Carletti, E., Kotz, H.-H., Krahnen, J.-P., Pelizzon, L. and Subrahmanyam, M. (2020), “Corona and Financial Stability 3.0: Try equity – risk sharing for companies, large and small”, SAFE Policy Letter, No 81, Leibniz Institute for Financial Research SAFE, March.
[5]Beck, T., Radev, D. and Schnabel, I. (2020), “Bank Resolution Regimes and Systemic Risk”, CEPR Working Paper, No 14724.
[6]Alogoskoufis, S., Giuzio, M., Kostka, T., Levels, A., Molestina Vivar, L. and Wedow, M. (2020), “How could a common safe asset contribute to financial stability and financial integration in the banking union?”, Financial Integration and Structure in the Euro Area, ECB, March.
[7]Brunnermeier, M. K., Langfield, S., Pagano, M., Reis, R., van Nieuwerburgh S. and Vayanos, D. (2017), “ESBies: Safety in the tranches”, Economic Policy, 32 (90), pp. 175-219, Oxford Academic (Oxford University Press).
[8]Leandro, Á. and Zettelmeyer, J. (2018), The search for a euro area safe asset”, Working Paper, 18-3, Peterson Institute for International Economics, March; revised version: February 2019.

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