Interview with Handelsblatt
Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Jan Mallien and Frank Wiebe
3 November 2020
Ms Schnabel, a new wave of the coronavirus (COVID-19), a new lockdown. Will the impact on the economy be a repeat of what we already experienced in the spring?
No, the effects are likely to be less pronounced this time, because the lockdown is more targeted. It is a hard blow to the services sector, but manufacturing is not being shut down and is benefiting from China’s strong recovery. After a surprisingly good third quarter, we will likely see a marked decline in growth at the end of the year.
Are governments doing enough to mitigate the consequences?
Fiscal policy will once again have an important role to play. Germany has already decided on new measures.
Do the decisions taken by governments at European level go far enough? Do we need additional programmes?
What matters now is for the existing programmes to be swiftly implemented. That’s especially true of the EU recovery fund.
Are we looking at a Hamiltonian moment, in other words the first federalisation of European finances, similar to that created by Alexander Hamilton after the founding of the United States?
The European package is a significant step. But it is crucial that these funds are deployed for investments that stimulate growth, such as promoting greener technologies or digitalisation. Otherwise there may even be a pushback for European integration, as the sceptics would then feel vindicated.
The individual euro area countries have been affected very differently by the crisis. Does that jeopardise the euro?
The pandemic has affected euro area countries with varying degrees of severity, depending in part on their economic structures, such as the importance of tourism. And the governments have different amounts of fiscal space with which to respond to the crisis. That is exactly why the European fiscal package, which supports Member States according to the severity of the shock, is so important. Through its pandemic emergency purchase programme (PEPP), the ECB is ensuring that our monetary policy is effective in all countries and is contributing to favourable financing conditions. Fiscal and monetary policy have strengthened people’s trust in the euro.
Asset purchases are intended, among other things, to prevent a sharp fall in inflation. Over the past few years, inflation has consistently been lower than projected by the ECB and by many of the world’s other central banks. Why have the projections been so far off the mark?
Many models are based on the assumption that inflation reverts to a long-term average. Structural trends such as demographic change or global shocks like the financial crisis and the COVID-19 pandemic are difficult to capture in these models.
What do you mean exactly?
After the financial crisis, people underestimated how prolonged the downward effect of such a shock on inflation would be. The pandemic could give rise to a similar problem. We don’t have much data from the past to rely on. Moreover, inflation projections are frequently reported merely as point estimates. The projections are, however, subject to great uncertainty – especially in the current situation.
The PEPP was envisaged as a temporary response to the COVID-19 pandemic, aimed for one at preventing a slide in inflation. But if the pandemic dampens inflation over the very long term, wouldn’t the PEPP have to continue for many years too?
No. The PEPP was expressly created because of the pandemic. After the crisis we must at some point fall back on our regular toolbox in order to bring inflation to a rate consistent with our price stability definition. But we’re still a long way off from that.
Even if the crisis pushes down inflation for a longer period?
Within the PEPP, there is a net purchase phase, in which we purchase additional assets, and a reinvestment phase, in which we keep the portfolio at a steady level by replacing maturing securities. I can imagine that the long-term effects would be taken into account when determining the length of the reinvestment phase, for example.
But wouldn’t it be possible to transfer the flexibility of the PEPP to other programmes?
We have not discussed that within the ECB’s Governing Council.
The ECB intends to review the deployment of all its monetary policy instruments by December. Could this result in a completely different mix than in the spring?
Before every monetary policy decision we ask ourselves which measures would be the most appropriate in the given situation. The current situation differs from that in March and that will presumably be reflected in the calibration of the instruments. The main concern at that time was to stabilise financial markets. By contrast, today’s financing conditions are very favourable in historical comparison.
So would a further lowering of the deposit rate for banks, which currently stands at -0.5%, now be conceivable?
Our analyses show that a further reduction would be possible without reaching the point at which it no longer works or even causes harm. But no decisions have been taken in this regard. For each decision, we analyse its effectiveness, whether it is proportionate and what side effects it has. This assessment of proportionality is a constant component of our decision-making.
Do the banks perhaps need even more support? It is, after all, foreseeable that there may be more insolvencies and thus also more loan defaults.
So far in this crisis, banks have been part of the solution and not the problem. They have helped to mitigate the effects of the pandemic. Part of the risk is currently absorbed by state guarantees, but we can expect an increase in non-performing loans in future. We are concerned that, according to surveys, some banks are tightening their credit standards. We are keeping a close eye on that. The economic downturn must not be further exacerbated by the banking sector.
Many savers are annoyed about the low interest rates. The ECB argues that these are necessary in order to push the current very low inflation towards the objective of 2%. Why don’t you use simple, understandable arguments? For example, that you want to tackle unemployment?
We regularly point out that our monetary policy supports economic development and the creation of jobs by improving financing conditions for businesses and households. However, under the EU Treaties the primary mandate of the ECB is to maintain price stability. As a secondary mandate we have the task of supporting economic policy in the EU – provided this does not jeopardise price stability.
This brings into play EU objectives such as full employment and combating climate change.
Often the objectives of the EU are in harmony with the objective of price stability. In the case of an acute lack of demand, for example, an expansionary monetary policy helps to keep prices stable and at the same time alleviates unemployment. The question of how we best communicate this will definitely play a role in the currently ongoing review of our monetary policy strategy.
And what happens if the objectives are contradictory?
Then price stability takes precedence, but we have a certain amount of flexibility because we aim to achieve our primary objective over the medium term. Thus we can react somewhat more cautiously in order to mitigate the effects on employment.
If the ECB is supposed to support the general economic objectives of the EU, shouldn’t it be more closely aligned with the policy of the European Parliament?
We are observers of politics. Within our mandate we have some room for manoeuvre in weighing up which secondary objectives we can pursue alongside price stability, and how strongly. We are in regular dialogue with the European Parliament, but we do not take instructions.
Why then do you justify combating climate change on the grounds that it has an influence on prices? On that basis, all kinds of other areas could also be defined as tasks of the ECB. For example, demographic change must have some kind of influence on prices.
We can hardly influence demographic change while, in the transition of the economy to climate neutrality, banks and capital markets play a decisive role. As a banking supervisor and key player in financial markets, we cannot avoid giving serious consideration to what role we can play.
But how large is this influence? Are you not raising expectations that are much too high?
We have always stressed that it is governments that are primarily responsible for climate policy. The key to this is making CO2 emissions sufficiently expensive, ideally globally. We cannot conduct climate policy, but we can support it.
But how, exactly?
There are many areas, and some of them are uncontroversial. For example, we must take the risks of climate change – and climate policy – and their effects on monetary policy better into account in our models. These risks also have an impact on banking supervision and financial stability.
Can you give an example?
If, for example, energy production that is harmful to the climate is banned or made very expensive, the corresponding investments diminish in value. That affects the assessment of bank loans, but also the question of what securities we can accept as collateral for ECB loans and what haircuts we demand.
Far more contentious, however, are the questions of whether the ECB should take climate considerations into account when purchasing bonds, and what criteria should be applied.
The EU is currently developing criteria and this taxonomy should be ready for use by 2022. However, it should not be forgotten that initially this would only concern corporate bonds, while we primarily purchase government bonds. In any case, climate criteria could certainly be taken more into account.
So, in the end, what will the climate strategy of the ECB look like?
That is exactly what will be discussed in the strategy review. Until now no decisions have been made on that. However, many agree that we must live up to our responsibility.
Central bankers often claim that they are not responsible at all for the low interest rates, but were simply following a major trend in the real economy which is determined by, among other things, the increasing ageing of the population and thus a great need to save. But how sure are you that the central bank is not depressing real interest rates at least in part?
This question is subject to dispute among academics. However, it is widely acknowledged that the trend towards low interest rates, in large part, was not caused by monetary policy. This development is far more dependent on an economy’s innovative strength and growth capacity. Those are long-term processes that we can hardly influence. Our task as a central bank is to stimulate or dampen demand in the economy in such a way that people can rely on price stability.