ECB Insight: Villeroy Offers Latest Confirmation That Delta Variant Not the Biggest Deal
27 August 2021
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau’s comment Thursday downplaying the economic impact of the Delta variant offers the latest confirmation that the variant shouldn't be a major factor at the next monetary policy meeting of the Council.
In a speech, the Banque de France governor lauded French businesses’ adaptability - and consequent resilience - in the face of coronavirus variants. ‘The effect of the Delta variant would only be indirect, through the lower growth of Asia and indeed the United States’, he said.
To be sure, coming from Villeroy this was not entirely new; already in mid-July, he had clearly minimised the threat from Delta, ranking it third among risks to the French economy, behind labour recruitment difficulties and supply constraints. What is significant however is that a month and a half later, his view not only remains valid, but has evidently gained traction on the Governing Council.
That this would turn out to be the case was not obvious then. According to the account of the July 21-22 monetary policy meeting also published yesterday, although there was ‘less immediate economic impact than might have been feared’, the economic assessment was that ‘the increasing spread of the Delta variant could dampen the recovery’.
Individual members of the Governing Council were warier yet. Bank of Slovenia Governor Boštjan Vasle for example issued a statement the day after that meeting noting that ‘the Delta variant is already causing a renewed surge in cases in certain euro area countries, and represents the greatest risk of slower growth.’
Mārtiņš Kazāks, Governor of Latvijas Banka, told Econostream in an interview late last month that Delta was ‘the best example’ of the downside economic risks. ‘We don’t know what’s going to come out of that’, he said. ‘So we have to be cautious, and this cautiousness will also guide our policy decisions.’
A month later, and one of the most cautious members of the Governing Council, Chief Economist Philip Lane, said merely that current headwinds included further supply constraints, possible global economic deceleration and ‘maybe some risk’ related to Delta.
While naturally not sounding the all clear, given the higher risk Delta poses to certain sectors, Lane’s assessment was probably as reassuring as could be expected: ‘[I]n terms of the overall economy, the impact is quite limited so far … Europe may not be among the regions hardest-hit by Delta’, he said.
Just days before that, his Executive Board colleague Isabel Schnabel didn’t even refer explicitly to Delta when asked in an interview what was next for the economy. ‘We continue to expect to see a strong recovery’, she said. ‘Given the high level of vaccinations, another hard lockdown is unlikely, despite the current rise in incidence rates.’
Like Villeroy, Schnabel rated supply constraints higher as a negative economic factor.
The so-far relatively benign view of the Delta variant should give the ECB Governing Council more leeway to take into account reasonably relaxed financing conditions and possibly start slowing the pace of asset purchases so as to minimise cliff effects.
More importantly, the fact that Delta, so feared when it first manifested, now seems to elicit little more than shrugs on the part of monetary policymakers suggests that at least the emergency phase of the pandemic is a good step closer to having run its course.
After all, if economies can now more or less take in stride a particularly infectious mutation of the coronavirus, then the most logical conclusion may be that we have learned to live with the pandemic.
This in turn markedly increases the probability that the ECB will consider it reasonable to end the pandemic emergency purchase programme (PEPP) on time next March.
Resistance on the basis of the Delta variant to stopping net PEPP purchases may not even come from the dovish end of the spectrum. Already four weeks ago, Executive Board member Fabio Panetta suggested that the variant’s impact would be weaker than previous waves of the pandemic. So far, events seem to have borne that prediction out.