ECB’s de Guindos: May Start to Think About Phasing Out Emergency Measures

3 May 2021

By David Barwick – Frankfurt (Econostream) – European Central Bank Vice President Luis de Guindos on Monday suggested that the emergency measures taken by the ECB may be approaching the point at which they would need phasing out.

In the interview with Italian daily La Repubblica, de Guindos, asked whether Governing Council members calling for tapering were right to do so, said that he did not ‘have any preconceived notions in this respect.’

‘The way in which the economy develops will be the deciding factor’, he said. ‘If by speeding up the vaccination campaign we manage to have vaccinated 70% of Europe’s adult population by the summer and the economy starts to pick up speed, we may also start to think about phasing out the emergency mode on the monetary policy side.’

Observing that manufacturing was ‘already doing very well’ and that services ‘should soon be able to recover’, de Guindos suggested that ‘in a year’s time the pandemic will be behind us, social distancing will be a memory and the economy will be back to pre-pandemic levels’.

 ‘[M]onetary policy will have to adjust to that’, he added. Monetary policy normalisation should accompany economic normalisation, he said. ‘Once the pandemic is over and the economy starts to get back to normal, then obviously monetary policy will also have to start doing the same.’

Although premature withdrawal of support ‘could stymie the recovery’, he said, ‘prolonging emergency measures for too long may run the risk of moral hazard as well as the zombification of parts of the European economy.’

That did not imply an interest rate hike, he made clear, but simply ‘a cautious exit from the emergency programme’ that ‘should be managed with a great deal of prudence.’

Although he described the current situation as ‘bittersweet’ on account of a weaker-than-expected first quarter, he noted accelerating vaccination campaigns as ‘good news’ that ‘will have a major impact on the economy’.

‘We expect the second half of the year to be very positive, even if there is still uncertainty’, he said. Wherever else vaccination campaigns gain speed, ‘the situation normalises rapidly’, he said. ‘I hope that we will be in a much better situation by early summer.’

As for the possibility of a wave of bankruptcies, de Guindos simply repeated his call for measures to be ‘withdrawn gradually and with a great deal of prudence after the crisis.’

Europe’s Next Generation EU recovery plan would hopefully soon start, allowing Europe ‘to quickly bridge the gap with the United States’, he said.

The increase in nominal sovereign bond yields associated with the earlier start of the US recovery is ‘natural’, he said, especially with markets also thinking inflation will mount.

‘At the ECB we have tried to counter this and we have succeeded: European bond yields have been very calm since March’, he said. ‘The markets have understood that the United States are further ahead in the recovery cycle and that, based on the economic fundamentals, the pressure on yields was unjustified.’

The euro is ‘one of the most important variables’, he said, and is monitored ‘very closely’.