ECB Insight: Holzmann Wages Lonely War on QE, but ECB Bank Credit Also Comes in for Beating

18 November, 2021

By David Barwick – FRANKFURT (Econostream) – Though there are certainly others on the European Central Bank Governing Council who are sceptical about some of what the ECB is doing, Council member Robert Holzmann seems highly unlikely at this juncture to be joined by anyone in his campaign to put an end to all quantitative easing.

In comments Wednesday evening at an Austrian university, Holzmann, who heads the Austrian National Bank, did not only express support for ‘certainly letting the PEPP [pandemic emergency purchase programme] be discontinued at the end of March, because it has done its duty and can expire.’

Rather, he also drew a bead on the asset purchase programme (APP), noting that it had been created to boost liquidity on financial markets and that the latter were now awash in liquidity.

Inflation was too high and likely to stay that way, the ECB would still retain a vast amount of purchased debt on its balance sheet, and continued net purchases could bump up against limits authorities must take care not to breach, he argued.

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

Most disposed to second Holzmann’s motion on the Council is probably Germany’s Jens Weidmann, who has repeatedly expressed scepticism about QE. But Weidmann is unlikely to be a fan of anything too sudden, and indeed, in September he urged avoiding an abrupt end to PEPP asset purchases via a gradual reduction ‘if the situation allows’.

In any event, Weidmann is on the way out, a circumstance Holzmann expressed concern about. Were Weidmann to be succeeded by a very different Bundesbank head who advocated along the lines of ‘we cannot have enough liquidity’ Holzmann said, ‘then it becomes somewhat problematic’ for all those countries that entered monetary union with Germany in the expectation of ‘a stability oriented central bank policy for the euro’.

Then there is the Netherland’s Klaas Knot, who, while undisputedly hawkish, gave little indication in a speech just last week that he would endorse anything quite as radical as what Holzmann seems to have in mind.

Holzmann admitted forthrightly that he saw no emerging consensus within the Governing Council in support of ending QE, and it seems likely to stay that way for the time being. If QE has any other enemies as bitter, they have flown well under the radar.

As if blanket opposition to QE weren’t enough, Holzmann seemed to have a large bone to pick with the ECB’s provision of credit to banks. 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.

‘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.’

Although it is increasingly clear that at least the extremely favourable terms on which the ECB has granted credit during the crisis will be adjusted before too long, that the ECB is granting credit has in general not generated notable opposition.

In this regard too, therefore, it is evident that Holzmann will have his work cut out for him if he wishes to do away with this policy option. We see little chance of imminent success, with most if not all other Council members willing to give patience a chance for now.