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Interview with Agence France-Presse (AFP)

Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Jean-Philippe Lacour

16 September 2020

While the current rise of the euro is recognised as an element that can reduce inflation, the ECB claims there must be “no complacency” when it comes to reaching the objective of price stability. Will a verbal intervention be enough to prevent the euro from continuing to rise?

We are not targeting the exchange rate. We adjust our policies according to the medium-term inflation outlook. And at the last Governing Council meeting there was still an exceptionally high level of uncertainty. As President Lagarde explained at the press conference, it was the Governing Council’s view that more information was needed on how the pandemic evolves, how our measures transmit to the real economy and how persistent exchange rate movements would ultimately prove to be. We continue monitoring incoming information carefully, including developments in the exchange rate, and we stand ready to act if the incoming data is not consistent with the objective of our emergency measures to close the inflation gap that has emerged as a result of the pandemic.

Eurozone unemployment is increasing rapidly, core inflation reached historic lows in August, the pandemic is gathering pace. Yet the ECB is a little less gloomy about the economic outlook than three months ago. How does that fit together?

We do not see a V-shaped economic development where we return to the pre-crisis path very quickly. Instead, we see a protracted recovery that takes time, and the same is true for the inflation outlook.

Regarding inflation, we never base our decisions on just one month of data; we focus on how it evolves over the medium term. We see that our measures provide tangible support to core inflation, which was, however, partly offset by other factors. 

Eurozone citizens often feel that prices are climbing faster than official inflation data suggest. Do you think this misunderstanding can harm public support for ECB policies?

This has indeed been observed in many countries, so it must be taken seriously. This perception has mainly to do with the fact that households buy goods relatively more often for which prices have gone up more quickly – take food, for example – and they don’t really perceive that the prices of other goods, which actually have quite a bit of weight in the consumption basket, have increased by much less. I think that there is a need to communicate this better and to also work on a better understanding of what the inflation rate actually measures. 

Do you see the ECB imitating the Fed, which listened to the public and concluded that it will now aim for an “average inflation target”?

In our monetary policy strategy review, which has just been resumed, we will also listen carefully to the different stakeholders. As far as the monetary policy strategy is concerned, the euro area differs from the United States in several important aspects, starting with the mandate. We also have a different economic structure and our financial system is much more bank-based. We will review our strategy with an open mind but it could well be that we do not end up with the same strategy as the Fed. 

Could some of the emergency fiscal actions by governments in response to the COVID-19 crisis increase the risk of a “zombification” of a part of the economy? 

We are still in the middle of the pandemic – this requires a lot of support from the fiscal, as well as from the monetary side. This has helped viable firms to survive. It would be dangerous to end the fiscal support prematurely. This mistake was made before and I don’t think we should repeat that. 

But we’re all aware that the crisis will bring structural change. In addition, we are facing secular challenges, such as the green and the digital transition, which will require support by fiscal policy. Therefore, it would be a mistake to try to preserve the pre-pandemic economic structure. Instead, we have to make sure that the crisis measures support the transition to a sustainable growth path. 

Can the public debt held by the ECB at some point undermine its independence?

Even after years of asset purchases, the ECB is holding a relatively small share of outstanding government debt on its balance sheet. The bond free float, i.e. the share of bonds that is held outside of the Eurosystem, amounts to close to 80% when taking into account the maturity structure of outstanding government debt. 

What do you say to those, in France in particular, who advocate the cancellation or the perpetualisation of the public debt held by the ECB?

The simple answer is that it is prohibited by the Treaty, because this would clearly constitute monetary financing. We are guided by our price stability mandate and we are not allowed to finance governments.

But when the ECB claims that it will replace the maturing public bonds with new purchases, isn’t that the same as converting them into perpetual debt?

No, because these reinvestments are limited to a specific time period or are contingent on a sustained return of inflation to our aim, implying that purchases are not unlimited.

Regarding Brexit, how concerned are you about a no deal that is likely to weigh on economic activity?

A no-deal Brexit would be harmful for everybody, especially for the United Kingdom, but also for the euro area. I would encourage the negotiating parties to work hard on avoiding that outcome. In any case it’s important that financial institutions and other market participants are prepared in the event of a no-deal scenario. 


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