ECB’s Schnabel: ECB Has Large Set of Tools, None Fully Deployed

21 March, 2020

By David Barwick - FRANKFURT (EconoStream) – The European Central Bank has many instruments available to counter the current crisis and has not yet fully deployed any of them, ECB Executive Board member Isabel Schnabel said over the weekend. In an interview with German weekly Frankfurter Allgemeine Sonntagszeitung, a text of which the ECB made available, Schnabel suggested that a pending legal challenge to the ECB’s bond purchases would be no obstacle to ECB action given the proportionality of the latter. “The ECB is in the comfortable position of having a large set of tools, none of which has been used to its full extent,” she asserted. “We stand ready to take further measures if needed to fulfil our mandate.” The ECB’s options include key interest rates, liquidity provision to banks and its various asset purchase programs, all of which can be called on if financing conditions need support, she said. “That is immensely important during such a crisis,” she added. “The claim that central banks have run out of tools simply doesn’t match up to the facts.” With Germany’s constitutional court having postponed to May a decision on the legality of ECB bond purchases during the euro crisis, measures taken now must be “proportionate” to the problems, Scnabel said. “Given the severity of this crisis and the threat of massive economic damage, our monetary policy decisions are in my view appropriate,” she said. Schnabel agreed that crisis bonds issued jointly by Eurozone member states “could help,” saying she could picture “one-off ‘corona bonds.’” Fiscal policy measures would determine the success of the ECB’s actions to counter what is “ultimately a European problem,” she said. “It is up to politicians to decide.” The crisis cannot be allowed to spread to banks, Schnabel said. These are fortunately in much better position now to withstand turmoil than they were pre-2008, but “no one could have imagined” the current scenario, she said. Were it to come to mass bankruptcies, this would impact banks, but the issue is often one of scarce liquidity, which “politicians can deal with,” she said. “The decisive factor is how long the crisis persists.” Schnabel called “a little out of place” a guest commentary in the March 15 edition of the paper urging that the ECB signal its intention to tighten monetary policy post-crisis. “We are looking at what might well be one of the worst economic crises of all time,” she argued. “It seems inappropriate to be talking about raising interest rates now.” The ECB’s asset purchases, which it expanded as part of a package of anti-crisis measures, continue to reflect Eurosystem member countries’ capital share, she said. “But we need more flexibility now, over time as well as across countries and asset classes, in order to tackle the situation appropriately.”