ECB Insight: Schnabel a Solitary Contrasting Voice on the Executive Board

7 July 2021

By David Barwick – FRANKFURT (Econostream) – The uniformity with which the European Central Bank Executive Board leans dovish makes member Isabel Schnabel a solitary contrasting voice. Indeed, a closer look at her recent comments side-by-side with those of a dovish colleague reveals considerable differences not far beneath a common surface.

Even if Schnabel is not as hawkish to nearly the same degree to which fellow Board member Fabio Panetta is dovish, the contrast between the two can be seen particularly well in the context of their latest contributions to the public discussion about the potential for inflation to recover, nominally the key determinant of monetary policy.

Both of them recently set out visions of a return to better days in this respect, but for Panetta it was another instance of why policy needs to go to greater lengths – his leitmotif - while Schnabel was interested in identifying emerging upside risks – a rare pandemic-era pursuit for the ECB.

For Schnabel, the occasion was a speech last Saturday in which she expressed ‘cautious optimism that the euro area economy may eventually escape the low growth, low inflation environment that has dominated the macroeconomic landscape for most of the past decade’.

Five days previously, Panetta had framed his intervention in almost indistinguishable tones, speaking of ‘the potential, for the first time in more than a decade, to bring us back sustainably to our inflation aim and to an economy operating at full capacity.’

While in Schnabel’s narrative it was the increase in inflation expectations as economies left the pandemic behind them that set the stage for a possible escape from persistent lowflation, in Panetta’s it was ‘the current phase of monetary-fiscal cooperation’.

Their policy conclusions at first glance clearly overlapped. In Schnabel’s case, ‘continued fiscal and monetary policy support is needed to nurture and cultivate the nascent recovery and to set in motion a virtuous circle of rising underlying inflation and wages.’

For Panetta meanwhile, for success in escaping the liquidity trap ‘and sustainably reflating the economy, there needs to be the confidence that combined policy support will not be withdrawn prematurely.’

A dig somewhat deeper down, however, reveals the superficiality of this similarity. In essence, the shared overarching prescription of extended policy support is for Panetta a springboard that leads him not uncharacteristically in a more-is-better direction, while Schnabel is more interested in exploring already extant ‘chances for inflation to move closer to our aim in the medium term’ than in holding out price stability hope and then conditioning it.

So it is that Panetta characterises the ECB’s forward guidance as ‘a natural window for fiscal action’ and perhaps a bit overreachingly promises that ‘[g]overnments that spend wisely today can be assured that they will not be penalised with a premature rise in borrowing costs.’

Moreover, he urges the preservation of the pandemic emergency purchase programme’s (PEPP) flexibility, in which – doubtless with an eye toward his native Italy – he sees a ready answer ‘when differences in financing conditions across countries represent a persistent obstacle to the transmission mechanism.’

For Schnabel, in contrast, among the many risks to the euro area inflation outlook are a number of upside risks already reflected to a degree in both market- and survey-based measures of expectations.

Among these is the non-negligeable possibility that workers’ bargaining power may strengthen as the recovery progresses, laying the foundation for second-round effects, a risk Panetta only says ‘remains limited’.

While she calls on monetary policy ‘to remain expansionary to avoid choking off the incipient recovery’, this is no appeal for policy activism à la Panetta, any more than is her advice to tolerate ‘inflation outcomes being moderately above our aim for a temporary period of time.’

In the context of a weak baseline inflation scenario – which Schnabel doesn’t so much call into question as she merely fills in gaps left by the ECB’s obsession with downside risks - continued monetary accommodation and a willingness to overshoot the price stability objective are already fixtures of the policy landscape.

The most recent interventions by Schnabel and Panetta are by no means the only ones to offer a study in contrasts. In an interview on May 28, Schnabel was also clearly less inclined than her colleague to see only downside risks to inflation.

‘Our baseline is that it is likely that most effects are going to be transitory and that at some point the bottlenecks will disappear’, she said. ‘But there is also a risk that it’s going to be different, so these are developments that we should watch very carefully.’

Two days previously, Panetta also gave an interview in which he spoke about inflation prospects. Then as now, his world was monochromatic, his prescription the usual: ‘… we need to preserve our credibility, continuing to act forcefully until we reach our objective.’

And where do the other members of the six-person Executive Board line up on this issue? Newcomer Frank Elderson has so far almost completely avoided public comments on such topics. ECB Vice President Luis de Guindos speaks less extensively than either Panetta or Schnabel on inflation but would appear to be situated somewhere in the middle of the two and indeed last week did not exclude the possibility of currently high inflation spawning second-round effects ‘that could translate into a more permanent development.’

President Christine Lagarde, who unlike Panetta and Schnabel has no doctorate in economics, rarely engages in such nuanced discussion, and as ECB chief naturally tends to promulgate the baseline scenario.

Then there is Chief Economist Philip Lane. Despite his position and the attendant responsibility of providing the economic assessment at every Governing Council meeting, Lane does not communicate with great frequency. When he does, he appears considerably closer to Panetta than to Schnabel.

‘So the narrative of this second-round dynamic, of course we look at it, we monitor it, but you actually have to see it converted into wage decisions and pricing decisions, and we don't see it so far’, he said on June 17, for example. ‘The economics of it is that we know it's going to take a long time for the labour market to fully recover, and without that full recovery, the bargaining strength to compensate for rising prices, without that dynamic it's very hard to sustain that narrative.’

Schnabel thus appears to be the only one on the Executive Board likely to round out a baseline inflation scenario by cautiously drawing attention to otherwise neglected upside risks. The June 10 meeting account to be released tomorrow could however reveal that her contrasting view enjoys somewhat more traction at the level of the entire Governing Council.