ECB Insight: Insiders Confident of Council’s Ability to Act Despite North-South Divide

6 June 2022

By David Barwick – FRANKFURT (Econostream) – Perhaps as part of the recent convergence of views among Europe’s monetary policymakers in the face of worryingly high inflation, European Central Bank insiders seem confident that ECB policy won't be hindered by the way philosophies across the Governing Council correlate to the indebtedness of individual members’ respective country of origin.

They voiced confidence that everyone would uniformly act in line with their mandate and take decisions in the coming weeks for the whole euro area on the basis of medium-term inflation.

‘Of course, people from those [relatively indebted] countries are a bit more worried, and understandably’, given their particular risks, said one person. ‘We need to take those risks into account. But I think this kind of normal tightening cycle, or this kind of smooth tightening cycle, or gradual or however you want to call it, should not be seen as a big risk anyway.’

‘For me, the risks are more the plans of the Italian government, for example, or the Greek government, or the Spanish or French government, to deal with the high debt levels’, he said. ‘Do they have credible plans how to do this?’

A second insider assured that ‘each and every Governing Council member is thinking about what is correct for getting inflation in the medium term close to 2%. I don’t think that anybody there is not thinking in terms of what is good over the medium term for the whole euro area.’

The policy positions of some of the Council outliers may be motivated by legitimate concerns such as ‘the fear that we’re not totally out of the Japanification threat’, he said.

This person also played down the significance of the fact that Executive Board member Fabio Panetta and Banca d’Italia Governor Ignazio Visco, each of whom is from Italy, both figure prominently among the most dovish members of the Council.

‘It’s not an Italian thing’, he said. ‘Ignazio can differ in his view greatly from Fabio, and I actually quite often like the logic behind Fabio’s reasoning. He’s sometimes at one extreme end of the distribution, but he’s rather clear and logical in his presentations.’

Yet a third insider also categorically rejected the idea that monetary policymakers would be restrained from action by national indebtedness. Everyone, he insisted, felt that it was up to the sovereigns to ‘think about a credible plan of fiscal consolidation to be implemented as soon as possible, because we want to reduce public deficit and public debt for many reasons, but one of the reasons is a scenario in which the cost of debt goes up.’

Not all was sweetness and light. It was also noted in the context of a fourth conversation that one side effect of Russia’s military aggression was to bring indebted countries’ purportedly more self-interested approach to monetary policy into greater relief.

In particular, the Baltic states, whose risk premia rose in reaction to the new threat from Moscow, far from suggesting within the Council that the ECB launch any ‘war asset purchase programme’ to help keep their spreads down, instead continued to look at the euro area as a whole, in keeping with the mandate.

An east-west partition of the Council - on top of the longstanding north-south divide related to sovereign debt levels - had thus not emerged so far.

When a Council member from the Eurozone’s south was presenting, what would be said ‘about backstop facilities and so on’ was predictable and tended to reflect the member’s domestic situation.

What was best for the southern member states was, in this telling, implicitly assumed to be best for everyone, behaviour not exhibited by the Baltic members of the Council, who consistently took a pan-European perspective.

And a fifth insider bluntly called it ‘no coincidence that governors of indebted countries will be doves’, though he expressed understanding for their position.

'They know that tightening will increase the costs of their governments and there will be the spreads, and Italy, Spain will get onto the firing range’, he said. ‘I understand they have social reasons as well. In other words, they don’t want unemployment, they don’t want instability in their country, they want the government to continue financing because without it, it would just choke.’