ECB’s Villeroy: Monitoring Euro Exchange Rate’s Negative Effects

13 January 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank is watching especially closely how the euro’s strength affects inflation, Governing Council member François Villeroy de Galhau said Wednesday.

In a hearing before the Finance Committee of the National Assembly of France, Villeroy, who heads the Bank of France, said that amidst the ‘strong disinflationary effect’ of the pandemic, which came on top of inflation that was ‘already too low’, Europe’s monetary authorities ‘remain clearly committed to our 2% inflation target’, he said.

To meet the target, ‘we will maintain favourable monetary conditions for as long as necessary, and we are monitoring with particular attention the negative effects of the euro exchange rate versus the various currencies’, he said.

The ECB’s targeted longer-term financing operations (TLTROs) and pandemic emergency purchase programme (PEPP) amount to a ‘“financing bridge” to help economic players get through this crisis’, he said.

The ECB will implement both programmes ‘with flexibility, without a pre-fixed quantity of purchases, but rather according to the financing accessible to firms and households’, he said.

With respect to the debt being incurred by national governments to counter the shock of the pandemic, a cancellation of this by the Eurosystem is ‘a seductive illusion, but it is not a solution’, he said, citing European treaties. ‘In the absence of consensus to modify these treaties, wanting to cancel debts would mean leaving the euro: it must be said’, he stated.

Villeroy said that the Bank of France’s latest monthly survey confirms its ‘cautious but confident’ December forecast, whose central scenario calls for 5% growth in France both this year and next, versus the projected Eurozone average of 4% both years.

The underlying assumption is that current contain measures would be withdrawn gradually from the second quarter, he added. However, French unemployment would approach 11% in the first half of 2021 and then retreat to around 9% at end-2022, he said.