ECB Insight: Stournaras, Awake at Night Worrying About a Withdrawal of ECB Support

4 October, 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Yannis Stournaras on Monday conceded the strength of the recovery in the euro area and in particular in his native Greece, all while vehemently urging monetary authorities to discount presently elevated inflation and maintain the current degree of accommodation.

For Stournaras, who heads the Bank of Greece, remarkably little seemed to have changed on the inflation front in recent months; with not so much as a word did he mention the upside risks that are preoccupying his colleagues, although he two weeks ago confessed with apparent reluctance that he’d ‘accepted’ the existence of those risks.

In Monday’s interview with Global Finance Magazine, Stournaras allowed that euro area growth was ‘expected to be strong in 2021 and 2022’, with GDP seen returning to pre-pandemic levels at the end of this year.

But if he saw upside risks to the Eurozone growth outlook, they seemed to have fallen by the same wayside as upside inflation risks. Instead, he complained of ‘a significantly uneven pace of recovery’ and willingly enumerated downside risks: ‘The epidemiological situation, geopolitical tensions possibly resulting in irregular migration inflows, the effects of climate change and private and public debt dynamics raise concerns and require continued vigilance.’

An apparent exception to the doom-and-gloom perspective was his own Greece, where ‘[a] milder-than-expected recession in the first quarter of 2021 and incoming data for the second quarter make us even more optimistic than before.’

And euro area inflation? ‘[L]argely transitory due to pandemic-related supply side bottlenecks and central banks should look through this temporary jump in inflation.’

The governor of the Greek central bank made no secret of his policy prescription:

  • ‘central banks should look through this temporary jump in inflation.
  • ‘our stance at the ECB is still appropriate.’
  • ‘patience is needed to avoid premature policy adjustments.’
  • ‘a persistently accommodative monetary policy stance is necessary’
  • ‘In fact … we have made explicit that our commitment to avoid a premature tightening may imply temporary periods of above target inflation.’
  • ‘Once the economy shifts to a solid recovery and there are definite signs of a rise in inflation to its target on a durable basis, then we should proceed at a gradual adjustment, applying flexibly the tools at our disposal.’

Anyone wondering what could motivate Stournaras to ignore widely accepted upside inflation risks, highlight exclusively downside risks to growth and tenaciously resist any reduction in monetary accommodation need look no further than the same interview, and in particular his telling answer to the question of what keeps him awake at night:

‘…the steep rise in the public debt ratio makes the economy vulnerable to new negative external shocks’, he said. ‘Temporary measures should be extended if needed to avoid cliff-edge effects but there is no room for a relaxation of the longer-term primary surplus targets, so that the financing needs for the coming decade remain manageable.’

What ‘new negative external shocks’ might he be thinking of? It seems reasonable to assume that a reduction in monetary support is somewhere near the top of his list. That is, he fears the potential consequences for Greece when the ECB starts, finally, to take the natural next steps in reaction to all the developments he – logically – would prefer to minimise.