ECB Brief: Lane, on a Communications Tightrope, Gingerly Presses On

10 May 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Monday tempered the optimism of his previous most recent public comments by a shift in emphasis from the upturn to come to the downturn that was as an argument for maintaining policy support.

In an interview with French daily Le Monde, Lane was asked about the state of the European economy. As Le Monde’s correspondents had explicitly mentioned the past economic contraction of the pandemic in posing the question, the backward-looking focus of Lane’s reaction may have been a surprise.

‘Rather than looking at this quarter by quarter, we should look at how far the economy is below its 2019 level’, Lane answered. ‘Right now, we're probably four or five per cent below that. This is a huge downturn. In comparison, in a normal recession, it is maybe one or two per cent.’

The fact that things are bad having been established, Lane proceeded to offer a more germane response, reiterating an earlier comment about an economic crossroads in less forceful terms (‘I think we are now, in May and June, at an inflection point’ versus ‘We are very much at an inflection point’) and with qualifications (‘the economy will be growing quickly, but from a subdued level’).

‘So even with pretty rapid growth for the rest of this year, the euro area would only get back to its 2019 GDP level around this time next year’, he concluded, stubbornly framing his perspective in terms of how far the Eurozone has fallen. ‘For the labour market, we think unemployment will only fall back to its 2019 levels in 2023.’

With that, Lane had set the stage for the last sentence of his response: ‘It is a long journey, which requires a sustained effort by fiscal and monetary policymakers to support the recovery.’

That message was worth doubling down on, and so he did a few minutes later. ‘It remains important that everyone recognises that the recovery is not going to be a super-quick process. It will require sustained fiscal and monetary support.’

Despite the clear shift in tone, none of this is likely to mean that Lane or anyone else on the Executive Board has fundamentally reconsidered where things are headed since Lane’s more optimistic-sounding interview on April 29 or the one days later in which ECB Vice President Luis de Guindos hinted at the approach of tapering.

Of course, Friday’s astoundingly dismal non-farm payrolls data from the US serve as a poignant reminder that the recovery can be a bumpy road, and Lane may have been cognizant of this. But in general, European data have confirmed a positive outlook, while vaccination campaigns have continued to make more rapid progress than a few weeks ago.

Rather than reflecting any change of heart, then, the ECB simply seems, reluctantly but inevitably, to be executing what amounts to a tightrope walk as it prepares the ground for what must come while striving to limit the pace at which it occurs.

Looked at that through this prism, it should come as no surprise when ECB Executive Board members – to a greater degree than the national central bank governors – sometimes seem to walk back their own or their Board colleagues’ manifestations of optimism and subsequently correct course yet again.

So it is that, asked what the ‘main financial risk’ was, he ‘would highlight the risk around corporates’, Lane replied. ‘Many corporates have lost revenues and survived only because of extensive fiscal support. We have to make sure that the phasing-out of these fiscal supports is not so quick or so severe that firms are unnecessarily pushed into insolvency.’

That contrasts with de Guindos’ reaction when, asked in an interview published one week ago if he feared ‘an avalanche of bankruptcies’, he first framed his answer in terms of what was ‘true … at the beginning of the crisis’, when such a possibility was – not is – ‘one of the biggest concerns’.

Pressed to comment on the current outlook, de Guindos said, ‘There will most likely be an increase in non-performing loans in the second half of the year, but we don’t expect it to be as acute as we feared at the start of the pandemic’, and urged banks ‘to take timely action to minimise any cliff effects’.

The ECB continues to approach major decisions inexorably, and Lane’s comments do not make appreciably more probable outcomes that monetary policy doves will derive satisfaction from.