Interview with NRC Handelsblad

Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Mark Beunderman on 1 July 2020

Are you satisfied with the solution that has now been found in the issue surrounding the ruling by the German Federal Constitutional Court?

Yes, we find this solution satisfactory, particularly as the ECB’s independence has not been impaired. We took a constructive attitude. We do not fall under the jurisdiction of the German Federal Constitutional Court, but we didn’t want to let the situation escalate.

You say that the independence of the ECB has not been impaired. But the accounts of the meeting of 4 June contain a lengthy discussion about the proportionality of the asset purchases. Was this not a reaction to the ruling of the German Federal Constitutional Court?

We have always held discussions about the effectiveness and side effects of our measures. In view of the German court ruling, it was quite natural that a particularly intensive and detailed debate took place at that meeting.

Has the tension between Germany and the ECB now subsided? The atmosphere was still rather toxic less than a year ago. Former ECB President Mario Draghi was labelled “Draghila” in the German press.

The euro enjoys a high level of trust in Germany, and even trust in the ECB is above the euro area average. And since the previous crisis, the general attitude towards the ECB in Germany, as I perceive it, has improved. Many acknowledge and appreciate what the ECB is doing in the current crisis. This may also be reflected in the way in which the German Federal Government and Parliament have dealt with the ruling by the Federal Constitutional Court.

Do you see it as your personal mission to improve the relationship between German public opinion and the ECB?

The communication between the ECB and the general public is very important, as has been stressed by President Lagarde. We need to do much more to reach out to people. I have made this part of my mission. But this goes beyond Germany. I am not “the German” within the ECB Executive Board. As far as I can see, many Dutch citizens also have a fairly critical attitude towards the ECB’s policy. I want to address them as well and explain better what we do.

That’s true. Many people in the Netherlands don’t understand what the ECB does. One of the sore points is that the endless period of persistently low interest rates is hitting the pension funds. The funding ratios are dire, pension cuts are looming.

We have to take this concern very seriously. The low interest rates have a strong impact on pension funds as well as on savings. But it’s a misperception to think that the central bank can determine interest rates on its own. Interest rates are mostly driven by long-term economic and societal trends, such as demographic ageing and low productivity growth. That’s why one sees low interest rates not only in Europe, but also in the United States and Japan.

That will probably remain so for some time and all financial actors have to learn to live with it. The Dutch pension sector is already adjusting its policies, by shifting from defined benefit to defined contribution schemes and by changing the structure of investment portfolios.

But the central bank still has room for discretion? It can decide on reducing interest rates to a greater or lesser degree; there are always discussions on that within the Governing Council.

Yes, but one should not forget that our monetary policy also has beneficial effects for pension funds. Our measures have benefited the overall economy and strengthened corporate balance sheets. That boosts the contributions paid into pension funds.

The ECB projections in June were very bleak: in the baseline scenario the ECB foresees an economic contraction of 8.7% in the euro area this year. Can we expect the projections to become even bleaker?

In recent weeks some confidence indicators have come in positive, which suggests that the recession could turn out somewhat milder than expected. But overall we are in the range of our baseline scenario. What is more important is what happens in the medium term. How strong and fast will the recovery be? That depends to a great extent on the policy reaction. A strong European recovery fund is absolutely crucial for Europe as a whole.

The Netherlands wants the recovery fund to be smaller than the €750 billion proposed by the Commission. And it wants only loans, not grants.

The Dutch government may want to reconsider its position – not only out of solidarity, but also out of self-interest. It is very unlikely that the Dutch economy is going to thrive if large parts of Europe are still struggling. If most of the fund is made up of loans, this could create a public debt overhang after the crisis. That could then cause problems of its own.

Do you think there’s a risk that countries like Italy and Spain, as well as being hit harder by the pandemic, will also recover more slowly?

Exactly. There may be further divergence among countries in the euro area.

In March, before the ECB launched its pandemic emergency purchase programme (PEPP), the bond spreads skyrocketed. Were there fears inside the ECB of a new debt crisis in the euro area?

I wouldn’t go that far. The spreads were far away from the levels seen in the euro crisis that had its peak in 2011-12. But we have learned from previous experience that one has to act early if there’s a risk of a self-reinforcing downward spiral.

So the ECB had to bring down the borrowing costs of Italy and Spain?

The first objective of the PEPP is to counter the risks to the inflation outlook over the medium term, which is being dampened by the crisis. The second objective is to counter the risk of fragmentation within the euro area. In times of crisis you can have a fast-moving, negative dynamic: capital flows out of fragile countries towards “safe havens” like Germany. Then borrowing costs in a country like Italy may rise quickly, not just for the government but also for households and businesses. That would create a problem for the ECB, because we have to make sure that our single monetary policy reaches the whole euro area.

By the way, it’s not that we say: Italian or Spanish spreads must not rise above a certain level. The yields on government debt differ among euro area countries, because economic fundamentals are different in each country. We don’t want to change that. But if suddenly, somewhere in the euro area, funding conditions worsen dramatically, then we have to counter this.

Does that make the ECB a unusual central bank? All the major central banks are now intervening on a massive scale in order to tackle the crisis, but you also have to keep the euro together.

Of course – we are in a special situation. The euro area is a union of largely sovereign states with a common monetary policy. This means that we have to act in a slightly different way from other central banks.