ECB’s Lane: Must Preserve Favourable Financing Conditions to Avert Risks to Economy

27 March 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank must continue to safeguard financing conditions so as to ward off the risks of self-fulfilling adverse dynamics or financial amplification, ECB Executive Board member Philip Lane said on Saturday.

In a speech at a digital workshop organised by The European House − Ambrosetti, Lane, who is also chief economist, said that ‘there is a clear risk of self-fulfilling adverse dynamics taking hold through which uncertain economic prospects induce households, firms and governments to hold back on expenditure plans, leading to a decline in overall demand that validates the loss in confidence about the future.’

Financial amplification is an added danger, he said, if lenders grow hesitant to lend and borrowers do not want to incur debt out of worries that future growth could become worse yet because of credit concerns and tighter conditions.

‘To counter these risk factors, it is essential that the ECB acts as a stabilising force and boost confidence by committing to the preservation of favourable financing conditions’, he said. The ECB makes good on this promise via its ‘full set of monetary policy instruments’, he said.

Lane called it essential that fiscal policy complement monetary policy; the former’s role ‘is especially predominant’ in an environment of low interest rates and an asymmetric impact across sectors of pandemic containment measures.

The Next Generation EU recovery fund ‘has a critical role to play’, with targeted public investment ‘an important growth engine for the post-pandemic economy, which is further amplified by the commitment to carry out growth-enhancing reforms’, he said.

Lane warned that ‘a sustained period of below-capacity economic activity damages the longer-term productive capacity of the economy’. Idle workers do not acquire knowledge they would have by working, and educational quality has also suffered because of the pandemic, impacting labour productivity, he said.

Moreover, companies that bore the brunt of social distancing measures have weakened balance sheets, he said, implying less investment and diminishing long-run productivity. Also, the shutting of otherwise healthy companies due to the pandemic means the loss of knowledge specific to those firms, he said.

In addition, there is uncertainty about the duration of the pandemic and about what it means for how people will work in the future, he continued, noting that business travel may be durably reduced.