ECB’s Villeroy: ECB Will Probably Have to Go Yet Further

6 May, 2020

By David Barwick – PARIS (EconoStream) – The European Central Bank will probably have to do more to support a return to price stability, ECB Governing Council member François Villeroy de Galhau said Wednesday.

Speaking before the Finance Committee and the Committee of European Affairs of the National Assembly, which is the lower house of the French Parliament, Villeroy said that the ECB’s policy response to the crisis has been effective so far and will be as flexible and innovative as needed to avoid unwarranted spreads. He cast doubt on hopes for a V-shaped recovery.

Villeroy said that price developments would remain weak in the wake of the current disinflationary shock and in particular given the risk that demand would not keep pace with supply when economies reopen.

“And so, in the very name of our mandate, we will be able to and will very likely have to go further and thus support the recovery with very low interest rates and abundant liquidity for a long time.”

ECB policy has been effectively addressing the surge in corporate loans while stabilizing its cost, he said. “…we will be as flexible as required – notably to avoid the fragmentation of the Eurozone with unjustified increases in the interest rates of certain countries; and we will be as innovative as necessary with our instruments.”

Noting “initial hopes” for a V-shaped economic rebound, Villeroy said it was now clear that the recovery would take time and require “patient and selective” measures of support. Household confidence, corporate solvency and the sustainability of public debt would be key elements of a return to growth, he said.

With regard to Tuesday’s decision by Germany’s constitutional court on the legality of ECB bond purchases during the euro crisis, Villeroy observed that the Court of Justice of the European Union had declared the ECB’s past actions proportionate to its mandate.

He rejected as “dangerous” doubts expressed about the ECB’s independence or its price-stability mandate, as these are the legal basis of monetary authorities’ decisions and of citizens’ confidence in their currency.

“We cannot cancel the public debts that we hold today, neither legally nor "fiduciarily": the suspicion of fiscal dominance would create distrust of the currency,” he said.

In other remarks, he said that France’s proposal of a European fund to jointly back new investment programs “would be the best expression of European solidarity”.