ECB’s Wunsch: Normalising Policy Won’t Be as Easy as Pumping Money Into Economy
30 April 2021
By David Barwick – FRANKFURT (Econostream) – Monetary policy normalisation will be harder than flooding the economy with liquidity, European Central Bank Governing Council member Pierre Wunsch said Friday.
In an interview with Belgian business daily l’Echo and its Flemish counterpart De Tijd, Wunsch, who heads the National Bank of Belgium, said that the risk of a return of the inflation spectre ‘seems quite limited to me today’, but qualified that by adding that Europe would ‘learn from what is happening in the US.’
‘The question there is how long a very flexible monetary policy can be combined with the accumulation of budget plans’, he said, noting that some prominent economists ‘believe that such a thing is untenable.’
As for European monetary policy, ‘[t]he exit will not be easy’, he said. The ‘easy part’ to date consisting of ‘pumping money into the economy’ has gone well, as this ‘isn't that difficult politically’, he said.
‘At some point we will have to return to something that is sustainable’, he continued. ‘The danger is that the feeling is now being created that there are no more limits. The sky is the limit, especially now that they launch billion-dollar plans in the US every few months. People are starting to think that creating money will solve difficult problems. But such a world does not exist. We live in a complicated society in which we have to make choices.’
Whereas US economic output would return to pre-pandemic levels shortly, ‘we initially aimed for mid-2022’, he said. The outcome depended on what people did, he said, proclaiming himself ‘pretty optimistic’ and affirming that there would be some additional spending from pent-up demand.
However, he warned, attention must be paid to those economic sectors that remain closed, ‘because we are gradually reaching the point where their entire value chain can collapse.’
‘For some of the businesses and companies, the revival will probably come too late’, he said, calling for the extension of appropriate fiscal support measures ‘until it is clear that the recovery is strong and robust in the sectors that have suffered badly from the crisis.’
Wunsch played down the significance of the additional national debt in Belgium, observing its long term and ‘almost negligible’ interest burden. Financing this would not require large sudden tax hikes or saving increases, he said. ‘That was also the intention: with a very flexible monetary policy, the central banks have facilitated the intervention of the government’, he said.