ECB’s Panetta: If We Fall Short of the Objective, Then We Will Need to Do More

11 April 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Fabio Panetta on Sunday suggested that if the inflation outlook did not indicate a return to price stability, then the ECB’s pandemic emergency purchase programme (PEPP) would need to be expanded.

In an interview with Spanish daily El País, a copy of which was made available by the ECB, Panetta said that ‘[i]n general, it would not be prudent to bet on a rapid recovery’, given the risk of disappointment. ‘And even if we do manage to exit the pandemic soon, we will realise that there is actually more damage to the economic fabric than is currently visible.’

At the same time, a better recovery that limited such damage was within reach, assuming ‘the necessary amount of monetary and fiscal stimulus’, he said. ‘A truly prudent policy approach calls for leaning towards injecting too much stimulus rather than too little.’

The ECB still has policy leeway, having used just a portion of the money allocated to the PEPP, he said. ‘But if we spend this money and still fall short of the objective, then we will need to do more.’

‘We cannot be satisfied’ with staff projections calling for HICP of 1.2% in 2022 and 1.4% in 2023, he said. ‘The argument that we could extend the horizon to meet the aim is not a convincing one’, he said. ‘The ECB has failed to reach its aim for too many years already.’

To wait would entail yet greater costs, if inflation expectations came unmoored or potential growth were permanently diminished, he said.

Panetta painted a glass-half-empty picture of economic developments, with uncertainty down ‘to some extent’ but still high; with vaccination accelerating but still slow; with the spread of the pandemic in some countries ‘weighing on the economic outlook’; and with Europe not returning to pre-pandemic activity levels before mid-2022 and possibly having 'permanently lost two years of growth.’

Similarly, inflation in the euro area would remain well below-target in the medium term, in contrast to the UK, the US and Canada, he said. ‘We need more ambition to help economic activity reach its potential and see inflation converge towards our aim’, he said. ‘And we need to give consumers and investors more certainty about the prospects for the European economy.’

The return of US inflation ‘to healthy levels’ reflects the fact that ‘monetary and fiscal policies are working forcefully together’, he said. ‘[W]ith a more dynamic policy mix, we could also fully benefit from the improved global outlook.’

Notwithstanding the apparent need to do more, the ECB’s decisions in December and March ‘have been very effective’, he said. ‘If we hadn’t intervened, the tightening of financing conditions would have had a negative impact on growth and inflation in Europe’, he said, which would be unacceptable given staff inflation projections ‘still way below 2%’.

Panetta characterised differences of opinions on the Council as variations in ‘[v]iews on the speed of decision-making’, understandable under high uncertainty, in the context of ‘agreement on the direction’. He praised ECB President Christine Lagarde’s ability to ‘obtain unanimity or a hefty majority for all the decisions we have taken.’

Wise use of the money from the Next Generation EU recovery fund could lead to a more balanced recovery across the area, he said, and ‘serve as a prototype for a future common fiscal instrument.’