ECB’s Holzmann: 'Long Story Short, This Quantitative Easing Has to Stop'

18 November, 2021

By David Barwick – FRANKFURT (Econostream) – With inflation likely to stay high and liquidity abundant, quantitative easing has ‘done its duty’ and has to stop, European Central Bank Governing Council member Robert Holzmann said Wednesday.

In comments at an Austrian university, Holzmann, who heads the Austrian National Bank, conceded that ‘quantitative easing was probably an important addition to the traditional instruments’ in view of the lower bound on conventional policy, but emphasised the problem of associated side effects.

‘Therefore, I would say, well, for me that already means … certainly letting the PEPP [pandemic emergency purchase programme] be discontinued at the end of March, because it has done its duty and can expire’, he said.

‘But also with the APP [asset purchase programme], which was made at the time to strengthen liquidity on the financial markets’, he said. Last week in London, he related, the message from economic actors he spoke to was that ‘liquidity is coming out their ears.’

Inflation is ‘far above 2%’, he continued, and ‘whether it will go back down, we don’t know, so at the moment I see a plateau, rather than a mountain where it goes down again quickly and promptly.’

‘And therefore, quantitative easing has done its duty, it can end’, he said.

One must keep in mind, he stressed, that stopping quantitative easing refers merely to net purchases. ‘We are not yet talking about the drawdown of stocks, and the stocks are gigantic: 4.5 trillion euros’, he said. ‘That's a lot of money, that's a lot of liquidity’.

Moreover, continued asset purchases could result in the ECB hitting limits, he said, breaching which ‘would greatly anger Karlsruhe [seat of the German Constitutional Court], and the last thing Europe needs now is a legal battle between Karlsruhe and the ECJ [Court of Justice of the European Union].’

‘So for me, long story short, this quantitative easing has to stop’, he reiterated.

Asked if a consensus to this effect was becoming apparent in the Governing Council, Holzmann replied, ‘No’, adding that he was seeking to communicate the need to stop QE, ‘because if I only open my mouth there, it's too late.’

Holzmann framed in rhetorical terms the basic choices regarding the PEPP and APP. ‘Are these programmes now going to end, or are they going to be changed, or are they going to continue?’ he asked.

‘So, will this unconventional monetary policy that we needed to avoid deflation, can they now stop buying new securities, or will they be continued if we believe that the pandemic is not yet over, or if we believe that the uncertainty is still too high,’ or, he continued, ‘to have the flexibility to support the interest rates of southern member countries if necessary...?’

Responding to a questioner who suggested that the ‘main purpose’ of low interest rates was ‘probably also to enable highly indebted countries to service their liabilities’ while postponing needed reforms, Holzmann said he was of ‘exactly’ the same opinion.

Credit extended to the banking system by the ECB at particularly favourable interest rates in the amount of 2,200 billion euros as of October may not have been the most effective investment, he suggested.

‘Now, here too, the question is: when the pandemic is over, should we stop, do we still need these subsidised interest rates, yes or no?’, he asked.

‘According to our estimates, these 2,200 billion euros - that's a lot, lot of money - which cost the central bank system about 20 billion and the Austrian National Bank alone about one billion euros, so in a sense not petty cash, were effective, but only to the extent that it led to a change in the lending volume to small and medium-sized enterprises of essentially about 7.5%’, he said. ‘In other words, a great deal of money with very, very market-distorting effects for a comparatively very, very small segment.’

Dealing with such issues was part of his job, Holzmann explained, ‘but also then to do it in the presentations at the ECB, because there are other countries that by all means say, "No! We absolutely want this programme to continue."‘

Inflation ‘is getting steeper and steeper’, he noted. Whether inflation would go up and then come back down or instead go up and then plateau ‘is the big question where we can have differing assessments’, he said. Among European monetary policymakers in this question ‘there is a high degree of diversity’.

Holzmann did not exclude second-round effects via wages or prices, saying that his ‘impression is that internationally, less so in Austria, there is more of a tendency’ among companies currently to think that they would be able to hike their prices.

Asked what he expected in terms of the effect of including owner-occupied housing in euro area HICP, Holzmann said that the estimate of 0.2 to 0.3 point as of a year ago had been superseded by a more recent ECB estimate of 0.5 to 0.6 point. Inflation even without this additional factor already goes ‘far beyond this’, he observed.

‘The pandemic, which began in February-March 2020, caused a ‘very serious blow’ to the global economy. ‘It fell back to one of the lowest growth rates of the last decades’, he said. Today, however, ‘I believe an important point is to understand that the pandemic in the economic sense – that is, in the sense of the loss of growth … is essentially over’, he said.

‘We still have the pandemic and the question of lockdowns, maybe a fourth will come, maybe a fifth will come, but the pandemic in itself, economically speaking, is over’, he said.

The speed with which the pandemic has been overcome economically is a ‘big change’ compared to the years it took to surmount the financial crisis, he said. 'In terms of severity, this was comparatively easy because apart from the health sector, the financial sector was prepared for this crisis, unlike in the past.'

While additional pandemic waves ‘with serious effects’ are not ruled out, he said, experience has shown ‘quite clearly’ that the economic consequences are progressively less, and the 2019 level of economic activity would not be undershot again.

Holzmann said he expected and hoped that whoever took over the helm of the German Bundesbank following Jens Weidmann’s departure would share Weidmann’s perspective.

‘As the French said in the context of German reunification, "Yes, you can do it, but only if you're willing to give up the Deutschmark"’, Holzmann recounted. In and of itself that was alright, he said. ‘But at that time the expectations were clearly formulated: yes, the D-Mark would be given up in favour of the euro, but the euro must satisfy the principles of the Bundesbank; in other words, it must pursue the same policy.’

‘But that has not happened in recent years, despite the need for an unconventional monetary policy’, he continued. ‘And that is also the reason why frustrations have arisen among past central bank presidents of the Bundesbank.’ Weidmann, he added, was ‘probably not the last’ to experience this.

On the other hand, if a very different Bundesbank head followed, one who advocated along the lines of ‘we cannot have enough liquidity, then it becomes somewhat problematic’, he said, ‘but also for other countries’ that entered monetary union with Germany in the expectation of ‘a stability-oriented central bank policy for the euro’.

Such an orientation ‘will not be the case under certain circumstances’, he added.