ECB’s Knot: Delayed Disbursement of NGEU Funds Would Be ‘Bad News’

8 April 2021

By David Barwick – FRANKFURT (Econostream) – A delay in the distribution of EU recovery fund money would be ‘bad news’, but would not necessarily be relevant for monetary policy, European Central Bank Governing Council member Klaas Knot said Thursday.

In an interview with CNBC, Knot, who heads the Dutch National Bank, said, ‘If indeed there were to be a delay in the disbursement of the Next Generation EU [NGEU] recovery fund, that would be absolutely a piece of bad news, because I do believe that fiscal policy is really at the forefront of the crisis-fighting policy response here.’

However, he elaborated, Europe’s fiscal response is largely at the national level, and the NGEU is not a cyclical but rather a structural instrument.

‘And in that sense, it’s less important for, let’s say, cyclical decisions and therefore should not have a direct impact on the monetary policy stance’, he said. ‘If of course this were part of a larger and wider-ranging deterioration in the economic situation, that would be a different situation. But at this moment I have absolutely no indication of that happening.’

Knot said he expected legal issues pertaining to the recovery fund to be resolved and disbursement to start this year.

The policy response needed now is ‘more about solvency support than it is about liquidity support’, he said. ‘I am convinced that there will be more fiscal stimulus forthcoming in the majority of the 19 member states of the euro area.’

This is a relevant factor for monetary policy, he said. ‘For our monetary policy stance, it is important that we have enough government bonds available to purchase, and on that score, I think there is enough supply and there is enough net issuance that we can simply proceed according to plan’, he said.

Knot reiterated his view that an increase in bond yields that reflects an improved growth and inflation outlook is ‘entirely benign, but if it is due to spillovers coming from different regions in the world then I think it is entirely legitimate for us to temporarily frontload some of the purchases.’

‘Because we don’t want the runup in bond yields to prematurely tighten our financing conditions’, he said, according to CNBC. ‘And with “prematurely”, I mean a tightening that would precede … the actual recovery in growth and inflation in the euro area.’