ECB’s Villeroy: ECB Will Act Very Strongly, But Can’t Do Everything

15 May, 2020

By David Barwick – PARIS (EconoStream) – The European Central Bank has acted and will act very strongly, but its policy needs to be reinforced by other policy areas, ECB Governing Council member François Villeroy de Galhau said Friday.

In an interview with Italian daily Corriere della Serra, Villeroy voiced confidence in Germany’s support for the ECB and the common currency, according to a text provided by the Banque de France, which he heads.

Steps taken by the ECB to mitigate the fallout from the crisis must be accompanied by fiscal action and structural reforms, he insisted: “The ECB acts and will act very strongly, but it cannot do everything.”

The ECB’s mandate includes both price stability and ensuring that monetary policy is transmitted throughout the region, he said.

“If we need to do more, we will do so,” he added. The strength of the ECB’s Pandemic Emergency Purchase Programme (PEPP) rests in its high volume as well as in the ECB’s ability to deploy it flexibly with respect to the distribution of purchases between public and private securities, across time and between countries, he said.

Villeroy indicated that he was unperturbed by the May 5 decision by Germany’s Constitutional Court declaring partly unconstitutional ECB bond purchases made during the euro crisis under the Public Sector Purchase Programme (PSPP).

“…most importantly, the reactions of [German Chancellor] Mrs Merkel on Wednesday and of the German leaders clearly confirm their support for the ECB and the euro,” he said. “I have no doubt about Germany's commitment to Europe beyond Karlsruhe.”

The ECB’s actions on March 12 and 18 were “of great benefit to Italy, and rightly so”, he affirmed.

On March 12, the ECB decided, among other things, on additional longer-term refinancing operations (LTROs) and a temporary envelope of additional net asset purchases of €120 billion until the end of 2020. On 18 March, the ECB launched the PEPP with an overall envelope of €750 billion.

Italian banks are the destination for almost 30% of all refinancing operations at present, Villeroy said. Moreover, he continued, since the PEPP was initiated, the Italian spread with Germany has averaged 2.1%, versus 5.6% over the 20 years before the euro.

The euro therefore makes it possible for Italy to finance its budgetary needs by paying much less”, he said. “This is an advantage from which France, Spain and other countries also benefit".