ECB Brief: Belgium’s Governor Wunsch No Monetary Policy Hawk After All

5 May 2021

By David Barwick – FRANKFURT (Econostream) – With a share in the European Central Bank’s capital of not quite 3% and a level of GDP that ranks sixth among Eurozone member economies, one might not expect Belgium’s central bank governor to play a crucial role in determining the outcome of an ECB Governing Council monetary policy meeting.

And yet Pierre Wunsch, who has been at the helm of the National Bank of Belgium for just over two years, may find himself wielding influence above his country’s weight as the Council approaches the need to consider when and how to extricate itself from the extraordinary policy measures it took in response to the pandemic.

The reason is simple: Wunsch’ increasingly apparent not-so-dovish views mean that the Governing Council faction of which all previous Belgian central bank governors have been reliable members since monetary union started may not be able to count on his unwavering support, affecting a delicate balance in a way that could have a major impact.

Like many new Governing Council members, Wunsch spoke relatively infrequently in the early days of his mandate - which started in January 2019 - even though he already had under his belt eight years as a director of the central bank, four as vice governor, in which capacity he was also alternate member of the ECB Governing Council and attended most monetary policy meetings with then-Governor Jan Smets.

With the outbreak of the pandemic one year into his term of office, even the most hawkish members were on board with the need to take extraordinary measures to mitigate the unprecedented economic fallout, and Wunsch went along with the rest, convinced of the need to rise to the occasion of a historic crisis with correspondingly bold decisions.

More recently, as brighter economic prospects increasingly characterise the environment, Wunsch has become noticeably less reticent. And while not explicitly advocating any policy stance, his comments better fit the narrative of the hawks in terms of the improved backdrop, the inevitability of policy normalisation or the idea that monetary policy is being asked to do too much.

At some point we will have to return to something that is sustainable’, he said in one recent interview. ‘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.’

On the economic front, he has been more bull than bear, calling himself ‘rather optimistic about the resilience of the European economy’ and suggesting that savings during the pandemic could boost private consumption for as long as five years. ‘In our projections we don’t have a lot of pent-up demand, I would be more optimistic on that’, he said.

As for the more delicate question of when the Council would start discussing an exit, he has been guarded, but admitted recently that ‘I hope we can [start] within a reasonable time frame’.

At the same time, Wunsch, who has voiced concern about insolvencies and consistently notes the importance of controlling the pandemic, does not balk at declaring that the ECB would do more if necessary.

Where does he line up then? Even if his comments in the weeks up to and since the ECB’s April 22 policy meeting were distinctly better suited to feeding the hawks than the doves, another Jens Weidmann or Klaas Knot – both firmly at the hawkish end of the spectrum of monetary policy philosophies - he is decidedly not.  

Driven like them by doubts about the sustainability of the ECB’s policies, Wunsch is one to wonder whether such profound monetary accommodation – or even the high level of stimulus before the pandemic - can last for long without unacceptably exacerbating the risks.

But in the end, he is not a hawk, and Belgium, a small open economy at the very heart of the European experiment – where debt now stands at 116% of GDP and there is broad consensus that structural reform is needed to boost investment – remains relatively unlikely to send a dyed-in-the-wool hawk to Frankfurt.

On balance, Wunsch is reasonably sure to support the ECB’s Executive Board as it attempts to back its way out of its suite of extraordinary measures, a process Vice President Luis de Guindos has now indicated is more or less pending. Wunsch may raise pointed questions, particularly when it comes to the strategic review, but is unlikely to favour rushing to the exit before the highest floors of the Eurotower endorse such a move.

That said, his view of the balance of risks, evidently more nuanced than that of many in the dovish camp, may yet confer on him disproportional influence. If any of the tough decisions yet to come turn out to hang in the balance, Wunsch may be the feather on the scale that, somewhat paradoxically, results in an outcome more apt to be associated with his hawkish colleagues.

To the extent such decisions make it onto the Governing Council’s agenda in the fourth quarter of this year, however, his influence will be diminished: according to the ECB’s rotation of voting rights, Wunsch will be obliged to abstain then from any formal vote, though he can still voice his mind during deliberations.