ECB Brief: No Attempt at Subtlety as de Guindos Hints at the Approach of Tapering

3 May 2021

By David Barwick – Frankfurt (Econostream) – European Central Bank Vice President Luis de Guindos on Monday gave the least ambiguous indication to date from the Eurotower 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, claimed to have no ‘preconceived notions in this respect’.

Although clear that the starting date and pace of any tapering would be data-driven, which he also indicated by calling economic developments ‘the deciding factor’, the fact that the ECB’s second-in-command chose to profess a complete lack of bias as an initial response to such a question is in itself significant.

In an interview with CNBC three weeks ago, ECB President Christine Lagarde said that the ECB remained ‘very far away’ from price stability, so that it remained too soon to discuss tapering. At the press conference on April 22, responding to the only question about tapering, she stressed that ‘we are not on the same page’ as the US Federal Reserve and will thus ‘not operate in tandem with the Fed.’

As for de Guindos, he has been solidly in the glass-half-empty camp of those who, in his own words in mid-April, adhere to the view that ‘the risks from the early withdrawal of policies are higher than the risks associated with keeping support measures in place’.

While he dutifully warned again today that ‘[p]hasing out stimuli too soon could stymie the recovery’, it is hard to overlook the shift in emphasis; now, ‘[o]nce 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.’

‘Obviously’.

Were that not to occur, the needless prolongation of emergency support would entail risks of moral hazard and zombification, he cautioned.

De Guindos did not merely put out the idea of tapering as an abstract, eventual imperative, instead naming clear conditions under which the ECB ‘may also start to think about phasing out the emergency mode on the monetary policy side.’ These included the vaccination of seven out of 10 European adults by summer and a recovery that picks up steam.

As it happens, Lagarde only last week predicted that some 70% of the population of Europe would have received at least an initial vaccine shot by end-June.

And as for economic recovery, de Guindos’ own comments dovetailed with the interpretation that the ECB has fairly high hopes in this regard that it has simply been playing down until now. ‘The manufacturing sector is already doing very well; services are still lagging behind but should soon be able to recover and close the gap with the industrial sector’, he said.

Lest anyone have failed to get the message, de Guindos continued by expressing the hope that ‘social distancing will be a memory’ in a year, at which point economic output is widely predicted to have returned to pre-pandemic levels.

‘[M]onetary policy will have to adjust to that’, he said.

Do de Guindos’ comments represent a complete about-face by what we last week in this space called ‘a tenaciously dovish ECB whose refusal to countenance better times seems increasingly at odds with the economic outlook on the ground’?

Ideally, they would. And while they will doubtless elicit howls of protest from some quarters, these may accomplish little if, as de Guindos also suggested, ‘we will be in a much better situation by early summer.’