ECB Insight: VP de Guindos Echoes Others Already Calling for Less ECB Support

1 September 2021

By David Barwick – FRANKFURT (Econostream) – Taking into account that the number two at the European Central Bank is never likely to express himself in a way that pre-commits his institution too clearly, Vice President Luis de Guindos’ remarks on Wednesday were a strong indication that the ECB would reduce support at next week’s meeting.

In a way, de Guindos was merely gilding the lily, his contribution to the public discussion being far from the first. Besides Econostream’s own reporting going back some weeks, a number of Governing Council members have revealed in the last few days, with varying degrees of frankness, their own willingness to see the ECB dial back its asset purchases.

However, de Guindos’ two cents carry considerable weight, coming as they do not only from the top of the Eurotower, but also from the member of the Executive Board charged with watching over financial markets and hence attuned to the conditions conducive to, and the implications of, such decisions.

In an interview with Spanish digital newspaper El Confidencial, de Guindos, asked whether the Eurozone was ready for asset purchases to be gradually reduced, said merely that ‘[b]ond market fragmentation had been avoided, and we have ensured that financing conditions remain favourable’.

Pressed, he then came out swinging, calling the second quarter recovery ‘very strong’ and predicting it would remain ‘fairly strong’ for the rest of the year. That the pandemic emergency purchase programme (PEPP) is tied to the pandemic he noted strictly perfunctorily, sandwiching the observation between his hawkish assessment of quarterly developments and the assertion that ‘one thing is clear: recent data are very positive.’

Europe would be back at pre-pandemic income levels by the start of 2022 if not in the fourth quarter of this year, he said. The Eurosystem would update staff macroeconomic projections next week, he noted; based on all his foregoing comments, the outlook as of June would at least be confirmed.

The Governing Council would take decisions consistent with prospects, he said. As for the PEPP purchase rate next quarter, ‘[i]f inflation and the economy recover, then there will logically be a gradual normalisation of monetary policy, and of fiscal policy too’, he said.

If the ECB wished to contradict the growing perception of financial markets that the momentum for a deceleration of PEPP purchases is gathering, this would have been the opportunity to do so, given tomorrow is the first day of the quiet period preceding the September 9 meeting and further remarks from top officials are unlikely. The ECB obviously did not wish to do so; indeed, de Guindos instead rather added to that momentum.

Given her own opportunity to take a stand, ECB President Christine Lagarde was understandably a touch more guarded, but made comments published Wednesday also justifying speculation that asset purchases could be at least moderately reduced in the fourth quarter.

In an interview with Time magazine, she reinforced the notion of an economy emerging from the crisis, saying that ‘not much damage’ had been left by the pandemic in terms of unemployment and that GDP would be at pre-pandemic levels by end-2021.

‘We are emerging from this pandemic, with economies that are stabilized, with, in a way, little sustained disruption’, she said. The appropriate policies were now ‘surgical’, she said; ‘it's no longer a question of massive support, it's going to be a question of focused, targeted support in those sectors that have been badly hurt.’

Asset purchases on a large scale are hardly an example of ‘focused, targeted support’. The fourth quarter looks very likely to ring in their gradual decline.