ECB’s Villeroy: Facing Sustained Too-Weak Inflation in Euro Area

7 April, 2020

By David Barwick - PARIS (EconoStream) – The euro area faces a situation of sustained too-weak inflation in the wake of the coronavirus pandemic, if not a risk of deflation, Governing Council member François Villeroy de Galhau said Wednesday. Villeroy, who heads France’s central bank, spoke in various settings, including before the Economic, Social and Environmental Council of France, which informs French social and economic policies; in an interview with RTL; and in an opinion piece in French daily “Le Monde.” Because demand following the pandemic will only return “gradually” and oil prices will remain low, Europe will “have to sustainably deal with, if not a risk of deflation, in any case with inflation too weak with respect to the definition of price stability,” he said. “This will create not only the possibility, but the obligation to maintain for a long time very low interest rates and ample non-conventional instruments, including public and private purchase programmes,” he said, referring to the ECB’s various asset buying schemes. While the Treaties of the European Union forbid monetary financing, it would theoretically be possible “to imagine the central bank sustainably creating money to finance companies directly,” he mused. “Nothing is excluded in principle in an intellectual debate. But only a major downside risk to price stability could lead to envisaging such decisions.” Villeroy rejected the notion that the ECB’s measures of March 12 had “missed their target” in contrast to the decision of March 18, emphasizing instead the complementarity of the two packages. Between them, the ECB has “triple flexibility,” he said, in that it can buy public and private assets; can buy sovereign debt of any country; and can exceed the issue limit of 33% for the Public Sector Purchase Programme. While Europe has to do more to mitigate the impact of the pandemic, “let’s look at the glass as three-fourths full already,” Villeroy said. The debate about so-called coronabonds is divisive, but the ECB’s “much more powerful” actions unite, he affirmed. While discussions about the involvement of the European Stability Mechanism and other sources of support continue, the asset purchase programme specifically launched to counter the pandemic’s impact has been operational for half a month already, he said. “Let’s relativize this debate: yes, European financial solidarity could do more, but let’s be aware that it is already doing a lot,” he said.