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The ECB's most difficult decision


After pulling out all their artillery against the coronavirus crisis, central banks seek the complicated balance of withdrawing aid without derailing the recovery

Christine Lagarde, President of the ECB.picture alliance / dpa / picture alliance via Getty I

This week marked the tenth anniversary of one of the most notorious slips in the history of the European Central Bank (ECB).

On April 7, 2011, Jean-Claude Trichet, then president of the organization, decreed a rise in interest rates in the final stretch of his term, which was soon revealed as an own goal.

The French justified this decision in light of data that, as he said at the time, confirmed a positive trend in activity.

A few months later, the European economy was bumping into the second half of the W-shaped recession from which it would have been so hard to get out.

The mistake was huge.

A decade later, the ECB can boast of having very little to do with it then.

The body that today is headed by Christine Lagarde, also French - and in general the rest of the world's major central banks - has learned its lesson.

These institutions have outlined a very powerful arsenal of instruments - asset purchase programs, systems to cushion the impact on banks of negative interest rates, liquidity rounds ... - to prevent what begins as a recession ends in a depression of long winded, with a spiral of price declines.

A trap from which it is very difficult to escape.

The response to the coronavirus crisis has been much more energetic than that of the crash that began with junk mortgages and the fall from grace of Lehman Brothers.

“Central banks have shown how important it is to react quickly.

Despite some initial errors in communication, it has been understood that it is easier to solve a problem of this magnitude with strong and early measures and not to fall short or wait, ”says Jorge Sicilia, chief economist at BBVA Research.

On this occasion, moreover, these organisms with gigantic powers and almost indecipherable language have not been alone.

Fiscal policy has accompanied monetary policy, whether in the form of ERTE, subsidized lines of credit or the multi-million dollar recovery fund designed by the European Union.

The ECB has shown greater capacity to react, yes.

But that does not mean that the horizon is clear.


The euro zone enters this last leg of the pandemic - last, as long as two requirements are met: a correct deployment of vaccines and that the virus does not bring new negative surprises - walking on a wire.

A somewhat subdued debate for now will gain decibels as the recovery progresses.

Lagarde and the other 24 members of the Governing Council - which brings together the six members of the Executive Committee and the 19 central governors of the monetary union - will have to decide the pace at which they begin to withdraw stimuli.

And, above all, when and how did they destroy the jewel in the crown of the tools deployed in this crisis: the Pandemic Emergency Purchase Program (PEPP).

The ECB fired the whiplash of the PEPP on the night of March 19, 2020. It was looking for the surprise effect.

And he achieved his goal: to show that he was serious.

This time in Frankfurt they were not going to allow the difficulties of some countries to lead to a debt crisis of the entire monetary union, as happened a decade earlier.

Then, the glass threatened to spill until in July 2012 Mario Draghi pronounced those words that guaranteed him a place in history: that he would do everything necessary to save the euro.

Bazooka against the virus

With the launch of the asset purchase program, the central bank committed to guaranteeing all the necessary financing for the huge expenses that governments were going to incur as a result of the pandemic.

The remedy would be to inject liquidity in droves.

And, in addition, with total flexibility.

In other words, if necessary, the ECB would support some countries more than others.

The PEPP was born with an amount of 750,000 million euros, but has grown to 1.85 trillion due to the new blows of the virus.

"If this program had not existed, the euro zone would have experienced a severe economic and financial crisis, with devastating consequences for the whole of society," Lagarde wrote on March 22 to celebrate the first anniversary of the great work of his mandate.

Bruegel's Jean Pisani-Ferry highlights the steps the ECB has taken in this crisis.

“The PEPP was a bold initiative that has been successful.

Taking it forward was not easy.

Lagarde and his chief economist, Philip Lane, have strongly called for innovative monetary policy and more cooperation with fiscal policy.

They have brought down the great wall of China erected in the Maastricht Treaty to protect the ECB from the influence of fiscal policy.

It is not a minor change ”, assures the former adviser to President Emmanuel Macron.

With friction, the successive extensions of the program have gone ahead.

But nothing guarantees that this will continue.

The Governing Council has made it clear that it will maintain the purchases, at least, until March 2022. And that it will reinvest the maturities until 2023. From there, everything is unknown.

Everything will depend on the performance of the economy in the coming months.

And the game of balances in the ECB.

The cacophony of voices is increasingly evident.

While the Italian Fabio Panetta, member of the Executive Committee, calls for a more determined action,


like the Dutch Klaas Knot send a clearly different message.

Those most reluctant to add more fuel to heat up the recovery insist that the second half of the year will bring more inflation and growth.

"If this scenario is fulfilled, it is clear to me that from the third quarter we can begin to gradually eliminate the PEPP," said this week the Dutchman, one of the toughest of those who sit in the sanctum of the ECB.

What is decided in Frankfurt will be key for Spain, the economy hardest hit by the coronavirus last year and which sees the vigorous recovery that the Government envisaged this year farther and farther.

“For Spain, the eventual withdrawal of stimuli could take it in a worse situation than other countries.

I am confident that the process will be gradual, thinking globally and without making big mistakes ”, summarizes Óscar Arce, Director of Economics and Statistics at the Bank of Spain.

  • The Fed launches the largest stimulus package since the Great Recession, coordinated with the rest of the major central banks

Arce, who accompanies Governor Pablo Hernández de Cos in the meetings in Frankfurt, assures that it would be helpful if Spain had a medium-term strategy of reforms and fiscal consolidation ready.

“We are weathering the crisis well, with a high volume of monetary and fiscal stimulus.

But at some point we are going to get out of this situation ”, he concludes.

The idea of ​​loosening moorings little by little is spreading.

In Germany the voices that warn of a hyperactive ECB predominate.

This is the opinion of Clemens Fuest, president of the Munich Ifo institute and one of the most famous economists in his country.

"Monetary policy has limited effects in a situation with zero or negative interest rates," he replies.

"The key to boosting the recovery is now in fiscal policy," he concludes bluntly.

The European response contrasts with that of the United States.

There, the activism of the new Biden Administration stands out, ready to go all the way.

And even a little further.

As soon as he approves a new stimulus plan worth 1.9 trillion dollars (about 1.6 trillion euros), the new Democratic president is already talking about another super package to invest two trillion dollars in infrastructure.

Meanwhile, in Europe, the recovery plan of 750,000 million lingers.

And it encounters unexpected obstacles such as the brake on the ratification of the German Constitutional, a decision announced on March 26 with effects that are very difficult to gauge because it blocks

sine die

subsidies and loans that, in theory, should have started to flow from the beginning. January 1 - and of which Spain hopes to obtain up to 140,000 million euros.

In addition, the president of the Federal Reserve (Fed), Jerome Powell, has made it clear that he will not raise rates until at least 2024, despite a recovery that in the United States takes cruising speed.

"We will continue to support the economy for as long as it takes," he said last month.

"The difference between one area and another lies in the ambition of the response", summarizes the economist Ángel Ubide.

“In the United States they want this time to be different from the past crisis.

They are not only looking to return to the level of activity prior to 2020, but to recover the growth lost due to the coronavirus ”, he adds.

Different leaders

Another difference between this crisis and the previous one is the profile of the captain in command of the ship.

In the tower of Frankfurt that houses the ECB, there is a regular longing for the former president, Mario Draghi, a central banker with a pedigree.

The Italian could raise blisters among the


, but no one doubted his deep knowledge of monetary policy.

Lagarde, on the other hand, has a completely different experience.

A lawyer by training, the former French minister and former head of the International Monetary Fund can show off stripes at political meetings.

But the press conferences after the Governing Council are something else.

There, any misplaced word can sink the markets.

It happened to him last year, when he had to rectify a phrase that triggered the risk premium in the south of the continent.

And it happens to him sometimes, that he skids in his explanations.

“That happens when you appoint a politician for this position.

Now many realize that not just anyone can be a central banker, "says a source who requested anonymity.

"Perhaps she would have been a good president of the European Commission," adds another, with a hint of malice.

“He has made costly mistakes.

His press conferences lack the dominance that markets expect from the president of a central bank.

His last appearance, in March, was the example of how not to do it.

Draghi could read the phone book and the markets were enthusiastic.

With Lagarde, sometimes the exact opposite happens ”, says Carsten Brzeski, chief economist at ING.

  • Lagarde ignites markets with disappointing message

It is not just the experience.

Lagarde also differs from Draghi in the way she leads.

Today's Italian Prime Minister led the way, often at the cost of inflaming spirits among his colleagues.

The French, on the other hand, seeks consensus.

She, who inherited a Governing Council between




, between north and south, has tried to heal the wounds.

But that was a formula that made sense in quiet times.

And the major blow that the coronavirus has caused leaves no room for hesitation.

The pandemic has also overshadowed a crucial question to which the ECB must respond.

The revision of its strategy, which will redefine the inflation target, was due to be ready in 2020, but the coronavirus has delayed it to the second half of this year.

The idea is to go from the baroque formulation of "below but close to 2%" to a much more direct one: simply 2%.

This is a seemingly minor change, but one with important consequences.

Although the details are yet to be defined.

And that's where the ECB can get muddy.

The US Federal Reserve made it clear last year that it was temporarily tolerating inflation above 2% and that it intended to address inequality issues emerging from the labor market.

This shift towards more heterodox positions puts pressure on the euro zone.

“The ECB could be perceived as a central bank with less tolerance for inflation above 2% even in a situation like the current one.

And that could have a structural impact on the exchange rate, leading the euro to appreciate.

That would be negative ”, explains the chief economist of BBVA.

"It is important that the ECB allow inflation to temporarily and moderately exceed that level, after having suffered such a long period of very low inflation," adds Arce.

“The Fed has been very explicit in redefining the new strategy.

And the ECB, in a Governing Council with so many people with so many different opinions, should do something similar to minimize ambiguity ”, closes Ubide.

Social imbalance

The risks are everywhere.

And central bankers know that they live in a world where they can no longer just talk about inflation.

Inequality, climate change, gender parity, cybersecurity, digital currencies… These are topics that previously did not enter the speeches full of mathematical variables that were pronounced by the heads of monetary policy.

Today a central banker has to go down in the mud.

Get wet on other issues.

But always maintain its primary function: to ensure price stability.

A difficult circle to close.

Source: elparis

All business articles on 2021-04-11

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