Euro

Philip R. Lane: Interview with the Financial Times

Retrieved on: 
Wednesday, March 17, 2021

Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Martin ArnoldA pandemic recession is unique because a lot of the decline in output results from public health measures.

Key Points: 

Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Martin Arnold

    • A pandemic recession is unique because a lot of the decline in output results from public health measures.
    • When these measures are lifted and the virus is contained, you should expect to see a very large recovery.
    • Once we get better control of the virus we should expect to see most of the economy just go back to normal.
    • There can be exceptions, though, such as the question of office work versus working from home.
    • By this I mean the airline industry and the hotel industry, whether business travel or tourism, which have taken a big hit.
    • It will probably take time for those sectors to go fully back to normal in terms of their financial capacity.
    • In this context, you might be more optimistic about inflation dynamics, even if the pandemic itself is definitely a severe negative.
    • What percentage of output could be permanently lost after we come out of the pandemic?
    • Our staff projections published last week foresee that euro area GDP will have recovered to 2019 levels by mid-2022.
    • It is not like the global financial crisis, where there were many years of lost output.
    • And again, you can be quite extensive in policy support because its only for a relatively short period of time.
    • That said, it is relevant that the euro area has 20 fiscal policies, the 19 national ones and the common fiscal element.
    • You need ways to demonstrate that people should believe that you will deliver your target over the medium term.
    • But what is true is that in addition to the single monetary policy, other measures are needed.
    • You cant just have one policy lever, and I think we learnt that in the previous crisis years to great regret.

Philip R. Lane: Interview with the Financial Times

Retrieved on: 
Tuesday, March 16, 2021

Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Martin ArnoldA pandemic recession is unique because a lot of the decline in output results from public health measures.

Key Points: 

Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Martin Arnold

    • A pandemic recession is unique because a lot of the decline in output results from public health measures.
    • When these measures are lifted and the virus is contained, you should expect to see a very large recovery.
    • Once we get better control of the virus we should expect to see most of the economy just go back to normal.
    • There can be exceptions, though, such as the question of office work versus working from home.
    • By this I mean the airline industry and the hotel industry, whether business travel or tourism, which have taken a big hit.
    • It will probably take time for those sectors to go fully back to normal in terms of their financial capacity.
    • In this context, you might be more optimistic about inflation dynamics, even if the pandemic itself is definitely a severe negative.
    • What percentage of output could be permanently lost after we come out of the pandemic?
    • Our staff projections published last week foresee that euro area GDP will have recovered to 2019 levels by mid-2022.
    • It is not like the global financial crisis, where there were many years of lost output.
    • And again, you can be quite extensive in policy support because its only for a relatively short period of time.
    • That said, it is relevant that the euro area has 20 fiscal policies, the 19 national ones and the common fiscal element.
    • You need ways to demonstrate that people should believe that you will deliver your target over the medium term.
    • But what is true is that in addition to the single monetary policy, other measures are needed.
    • You cant just have one policy lever, and I think we learnt that in the previous crisis years to great regret.

Remarks by Paschal Donohoe following the Eurogroup video conference of 15 March 2021

Retrieved on: 
Tuesday, March 16, 2021

It is customary that when we have a new finance minister joining the Eurogroup, we afford that minister the opportunity to make a presentation on their policy priorities.

Key Points: 
  • It is customary that when we have a new finance minister joining the Eurogroup, we afford that minister the opportunity to make a presentation on their policy priorities.
  • After that, we moved on to a number of discussions in relation to the budgetary policy response in the euro area to COVID-19.
  • We looked back to what we have done and ahead to what we will do.
  • Today, the Eurogroup agreed on the need to keep a budgetary stance in 2021 and in 2022, which will be supportive and which will pave the way for recovery.
  • As the health situation improves, the focus of our measures will gradually shift to promoting a resilient and sustainable recovery.
  • For the final items of the regular Eurogroup, we briefly took stock of exchange rate developments and of the post-programme surveillance in Greece.
  • More recently, the euro has continued to perform strongly against the dollar, but this has been offset by movements against other currencies.
  • And overall, the appreciation that we saw in the first phase of the pandemic has been stabilised.

Press contacts

ECB staff macroeconomic projections for the euro area, March 2021

Retrieved on: 
Friday, March 12, 2021

The recent intensification of the coronavirus (COVID-19) pandemic has weakened the near-term outlook for euro area activity but not derailed the recovery.

Key Points: 
  • The recent intensification of the coronavirus (COVID-19) pandemic has weakened the near-term outlook for euro area activity but not derailed the recovery.
  • Despite extended and more stringent containment measures, activity in the fourth quarter of 2020 declined by significantly less than expected in the December 2020 Eurosystem staff projections due to learning effects, strong manufacturing growth and a rebound in foreign demand.
  • Although the new lockdowns have been accompanied by additional fiscal support measures, another decline in activity is projected for the first quarter of 2021.
  • Thus, the medium-term outlook for real GDP is expected to be broadly similar to that foreseen in the December 2020 projections.
  • Compared with the December 2020 Eurosystem staff projections, HICP inflation has been revised up notably for 2021, related mainly to much higher oil prices, and slightly for 2022, but is unchanged for 2023.
  • The international environment of the March 2021 ECB staff projections does not take account of the recently approved fiscal package in the United States, due to the uncertainty with respect to its size, composition and timing at the time of the cut-off date.
  • The related risks to the projections for the US and euro area economies are presented in Box 4.
  • Under this scenario, real GDP would grow by just 2.0% in 2021 and would not reach its pre-crisis level within the projection horizon, with inflation at only 1.1% in 2023.

1 Key assumptions underlying the projections

    • Containment measures in the euro area became more stringent in early 2021 and are assumed to be relaxed only towards the end of the first quarter.
    • On average, they are expected to be more restrictive than in the fourth quarter of 2020 and what was assumed in the December 2020 projections.
    • Overall, containment measures are expected to have been completely withdrawn by early 2022, unchanged from the previous projections.
    • Similar assumptions regarding the evolution of the pandemic are, on average, made for the international environment.
    • Importantly, the monetary, fiscal and prudential policy measures are assumed to be broadly successful in avoiding severe real-financial feedback loops over the projection horizon.

Box 1 Technical assumptions about interest rates, commodity prices and exchange rates

    • Compared with the December 2020 projections, the current technical assumptions include higher long-term interest rates, significantly higher oil prices and a slightly weaker effective exchange rate of the euro.
    • The technical assumptions about interest rates and commodity prices are based on market expectations with a cut-off date of 16February 2021.
    • Short-term interest rates refer to the three-month EURIBOR, with market expectations derived from futures rates.
    • The methodology gives an average level for these short-term interest rates of -0.5% in 2021 and 2022, and of -0.4% in 2023.
    • As regards commodity prices, the projections consider the path implied by futures markets by taking the average for the two-week period ending on the cut-off date of 16 February 2021.
    • This implies an average exchange rate of USD1.21 per euro over the period 2021-23, which is 2% higher than the assumptions entailed in the December 2020 projections.
    • The assumption for the effective exchange rate of the euro has been revised down by 0.2% since the December 2020 projection exercise.

2 Real economy

    • Real GDP declined in the fourth quarter of 2020 but by much less than expected.
    • Real GDP declined by 0.7% in the fourth quarter, substantially less than the -2.2% expected in the December 2020 baseline and even less than envisaged in the mild scenario.
    • This upward surprise, despite containment measures being more stringent than expected, may partly relate to stronger than expected foreign demand but also seems to reflect learning effects as agents better adjust to containment measures across all economic sectors.
    • Overall, the level of real GDP in the fourth quarter of 2020 was 4.9% below its level in the fourth quarter of 2019.
Chart 1

    Euro area real GDP (quarter-on-quarter percentage changes, seasonally and working day-adjusted quarterly data)
    • Containment measures in early 2021 are expected to lead to a further slight contraction in real GDP in the first quarter, followed by a modest increase in the second quarter.
    • Faced with higher numbers of new COVID-19 cases and the threat of another wave caused by mutations of the virus, many euro area countries extended and further tightened lockdown measures in early 2021.
    • As in the fourth quarter of 2020, containment measures are expected to result in less of a disturbance to manufacturing activities but to weigh further on activity in the services sector.
    • Recently announced targeted fiscal measures to support the sectors affected by the lockdown are also likely to mitigate the overall loss in activity.
    • Activity is projected to rebound strongly during the second half of 2021, as containment measures are expected to be relaxed.
    • It will be mainly driven by domestic demand, in particular private consumption.
Table 1
    • Macroeconomic projections for the euro area (annual percentage changes) Notes: Real GDP and components, unit labour costs, compensation per employee and labour productivity refer to seasonally and working day-adjusted data.
    • The figures may differ from the latest Eurostat publications due to data releases after the cut-off date for the projections.
    • This table does not show ranges around the projections.
    • Private consumption is expected to recover strongly in 2021 and to remain the key driver of the recovery thereafter.
    • Private consumption is projected to resume its recovery from the second quarter of 2021 and to exceed its pre-crisis level in the third quarter of 2022.
    • The sharp and sudden contraction in housing investment in 2020 is expected to be reversed gradually over the projection horizon.
    • Housing investment increased by 0.5% in the fourth quarter of 2020 but was still almost 3% below its pre-pandemic level.
    • Looking ahead, with expected house price inflation outperforming housing costs, positive Tobins Q effects and a rebound in disposable income should support housing investment.
    • It is estimated to have rebounded significantly in the second half of 2020, partially recovering from its weakness in the first half of the year.

Box 2 The international environment

    • A more dynamic pace of recovery was observed in both advanced and emerging market economies.
    • Headwinds to the recovery intensified as the global pandemic worsened at the turn of the year.
    • An increase in new infections led governments to reimpose more stringent lockdowns, particularly in advanced economies.
    • While global (excluding the euro area) composite and manufacturing PMIs stood above their long-term average in February, some of their components signalled weaker activity ahead.
    • The recently approved additional fiscal package totalling USD 1.84 trillion has not been taken into account in the baseline and is therefore an important upside risk to the current projection baseline (Box 4).
    • Given the depth of last years global recession, global trade in goods has remained relatively resilient, while trade in services continues to be depressed.
    • This is supported by incoming data, which suggest that global goods imports returned to their pre-pandemic level in November 2020.
    • At the same time, international travel services, which account for around 7% of global trade in goods and services, remain constrained as a result of the pandemic and associated travel restrictions.
    • Imports are expected to increase by 9.0% in 2021, before decelerating to 4.1% and 3.4% in 2022 and 2023 respectively.
    • The international environment
    • The support from strong foreign demand sustained the recovery in euro area exports, which registered robust growth in the fourth quarter of 2020 despite the reintroduction of restrictions.
    • While a shift in demand from services to consumer goods boosted euro area manufacturing exports, the recovery in services exports particularly travel services remained subdued.
    • Employment in the fourth quarter of 2020 was, nevertheless, still 1.9% below the level in the fourth quarter of 2019.
    • This projection assumes that a high share of workers in job retention schemes can return to regular employment.
    • Labour productivity growth per person employed is projected to recover from the start of 2021.
    • By the end of the projection horizon, productivity per hour worked is expected to grow gradually to stand about 3% above its pre-crisis level.
    • Compared with the December 2020 projections, the profile for annual real GDP growth is broadly unchanged, reflecting several offsetting factors.
    • In addition, growth is supported by the upward impact of stronger foreign demand and additional fiscal stimulus.

3 Fiscal outlook

    • After the strong fiscal expansion in 2020, continued fiscal support is expected to mitigate the macroeconomic impact of the COVID-19 crisis in 2021 and further underpin the recovery.
    • In 2020, the fiscal stimulus measures taken by governments in response to the pandemic are assessed to amount to about 4% of GDP, slightly below the assumptions of the December 2020 projections.
    • Most of the additional measures are temporary and are expected to be reversed in 2022.
    • Adjusting for the impact of NGEU grants, the fiscal stance[4] is projected to be broadly neutral in 2021, with the previously expected tightening now postponed to 2022.
    • Finally, in 2023, with a broadly neutral fiscal stance and better cyclical conditions, the aggregate budget balance is projected to improve further to -2.4% of GDP.
    • Compared with the December 2020 projections, the euro area budget balance path has been revised up, apart from 2021, when the temporary additional stimulus offsets the improved cyclical conditions and the base effect of a less expansionary fiscal stance in 2020.
    • The decline over 2022-23 is due mainly to favourable interest-growth differentials, which more than offset the continuing, albeit decreasing, primary deficits.

4 Prices and costs

    • HICP inflation increased significantly in January 2021 to 0.9%, from -0.3% in December 2020.
    • In addition, a sizeable share of imputed prices for HICP inflation excluding food and energy in January 2021 (18%) implies higher than usual uncertainty as regards actual price pressures in the economy.
    • Looking ahead, HICP inflation is expected to rise to 2.0% in the fourth quarter of 2021.
    • [6] Following a strong swing from -6.8% in 2020 to 6.1% in 2021, HICP energy inflation is expected to have a broadly neutral contribution to headline HICP inflation in 2022 and 2023.
    • HICP food inflation in 2021 is expected to reverse its COVID-related surge of 2020, but to increase again from mid-2022 to stand at 1.9% in 2023.
    • HICP inflation excluding energy and food is expected to increase from 0.7% in 2020 to 1.3% in 2023, displaying strong quarterly volatility in 2021 and 2022.
    • Abstracting from the impacts of weight changes and changes in indirect taxes, underlying inflation is expected to gradually strengthen in the context of the ongoing economic recovery.
Chart 2

    Euro area HICP (annual percentage changes)
    • These schemes mainly affect compensation per employee in 2021.
    • The schemes safeguard employment in the presence of a significant reduction in hours worked, pushing down the annual growth rate of compensation per employee.
    • Beyond strong fluctuations in 2021, growth in unit labour costs is expected to provide, on balance, only muted inflationary pressures.
    • The strong fluctuations largely reflect expected developments in productivity rather than in wages.
    • Compared with the December 2020 projections, the outlook for HICP inflation has been revised up for 2021 and 2022 but is unchanged for 2023.
    • HICP energy inflation has been revised up for 2021 and revised down for 2022 and 2023, reflecting the assumption embedded in the oil price futures curve.

Box 3 Forecasts by other institutions

    • A number of forecasts for the euro area are available from both international organisations and private sector institutions.
    • Finally, there are differences in working day adjustment methods across different forecasts (see the table).
    • The March 2021 projections are broadly comparable with other forecasts for growth, while inflation is above other forecasts for 2021 and broadly in line thereafter.
    • The March projections for growth are within the range of other forecasts in 2021 but at the upper end in 2022-23.

Box 4 Risks to the US and euro area outlook related to the American Rescue Plan

    • On 10 March 2021 the US Congress passed the Biden Administrations American Rescue Plan, enacting, with some amendments, the first legislative priority of the new administration.
    • The associated fiscal package is very bold, totalling USD 1.84 trillion (8.8% of 2020 GDP).
    • The rescue plan is not included in the baseline projections, given the uncertainty with respect to its size, composition and timing that prevailed at the time of the cut-off date.
    • This box provides a first assessment of the possible economic implications of the fiscal package on the US economy, as well as spillovers to the euro area based on model simulations.
    • The fiscal package aims to mitigate the economic consequences of the coronavirus pandemic and reboot the US economy.
    • The scenario considered in the simulations is based on the package under discussion at the cut-off date (USD 1.9 trillion).
    • Estimated impact on US real GDP and euro area real GDP and inflation (quarterly; trillions of chained USD 2012 (chart a); impact on real GDP and HICP inflation in percentage points (chart b))
    • Turning to inflation, the positive output gap is expected to translate into inflation pressures in 2022.
    • Compared with the current projection baseline[11], the additional fiscal stimulus could raise US core personal consumption expenditure inflation by between 0.2 and 0.4 percentage points over the projection horizon.
    • The temporary nature of the stimulus would diminish the positive output gap and inflationary pressures in 2023.
    • At the same time, a strong pick-up in inflation could feed through to inflation expectations leading to unanchoring.

5 Alternative scenarios for the euro area economic outlook

    • As significant uncertainty about the future evolution of the COVID-19 pandemic and the degree of economic scarring persists, two scenarios, representing alternatives to the March 2021 ECB staff projections baseline, illustrate a range of plausible impacts of the COVID-19 pandemic on the euro area economy.
    • A mild scenario foresees a resolution of the health crisis by the end of 2021 and little longer-term scarring, while a severe scenario assumes a more protracted crisis and permanent losses in economic potential.
    • [15] Containment measures continue to dampen activity significantly across sectors of the economy until medical solutions are successfully implemented.
    • Compared with the baseline, the severe scenario features a more protracted negative economic impact of containment measures.
Table 2

    Alternative macroeconomic scenarios for the euro area
    • The same broad narratives underlie the scenarios for the global economy and thus for euro area foreign demand.
    • As a result, economic activity returns to its pre-pandemic levels towards the end of 2021.
    • In the severe scenario, economic activity would fall by 0.9% in the first quarter of 2021 and expand only modestly in the second quarter, before continuing its moderate recovery thereafter.
    • This outcome is further compounded by rather limited additional learning effects, significant ongoing uncertainty and financial amplification mechanisms, and only partly mitigated by policy support measures.
    • The current scenarios are more symmetric around the baseline compared with the December 2020 projections.
Chart 3

    Alternative scenarios for real GDP and HICP inflation in the euro area (index: Q4 2019 = 100 (left-hand chart); annual percentage changes (right-hand chart))
    • Labour markets would recover in the mild scenario, as policies are largely successful in preventing hysteresis effects that are only partially contained in the severe scenario.
    • This highlights the upside risks related to possible bankruptcies and corporate vulnerabilities, as well as potential hysteresis.
    • HICP inflation would rebound in the short term in both scenarios, with more variations thereafter due to differences in the balance of supply and demand.
    • Nevertheless, compared with the December 2020 projections, the variations between scenarios have become notably smaller as the severe scenario now has a less pessimistic outlook.

Box 5 Sensitivity analysis


    Projections rely heavily on technical assumptions regarding the evolution of certain key variables. Given that some of these variables can have a large impact on the projections for the euro area, examining the sensitivity of the latter to alternative paths of these underlying assumptions can help in the analysis of risks around the projections.
    © European Central Bank, 2021 Postal address 60640 Frankfurt am Main, GermanyTelephone +49 69 1344 0 Website www.ecb.europa.eu All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. For specific terminology please refer to the ECB glossary (available in English only).

CytoSorbents Announces 2020 Financial and Operational Results

Retrieved on: 
Tuesday, March 9, 2021

To this end, we have significantly expanded our clinical trial operational capabilities and will continue to do so in 2021."

Key Points: 
  • To this end, we have significantly expanded our clinical trial operational capabilities and will continue to do so in 2021."
  • The 2020 gain is directly related to the increase of the exchange rate of the Euro at December 31, 2020 as compared to December 31, 2019.
  • Our benefit from income taxes was approximately $1,127,000 and $1,092,000 for the years ended December 31, 2020 and 2019, respectively.
  • CytoSorbents has not historically given specific financial guidance on quarterly results until the quarter has been completed.

Isabel Schnabel: From green neglect to green dominance?

Retrieved on: 
Thursday, March 4, 2021

Intervention by Isabel Schnabel, Member of the Executive Board of the ECB, at the “Greening Monetary Policy – Central Banking and Climate Change” online seminar, organised as part of the “Cleveland Fed Conversations on Central Banking”, 3 March 2021 Frankfurt am Main, 3 March 2021 Climate change is one of the biggest challenges that humankind is facing.

Key Points: 

Intervention by Isabel Schnabel, Member of the Executive Board of the ECB, at the “Greening Monetary Policy – Central Banking and Climate Change” online seminar, organised as part of the “Cleveland Fed Conversations on Central Banking”, 3 March 2021

    • Frankfurt am Main, 3 March 2021 Climate change is one of the biggest challenges that humankind is facing.
    • It is becoming increasingly clear that these risks will not materialise in the distant future but much faster than expected.
    • The tragedy of an alleged long horizon[2] is increasingly turning into a tragedy of having too little time to act.
    • This has been fully recognised by European policymakers who have made the European Green Deal a top priority.

The obligation to act

    • [6] This is true under the primary mandate if central bank actions are necessary in order to maintain price stability.
    • Emerging evidence suggests that climate change is poised to affect price stability and the transmission of monetary policy to the real economy, especially but not only in a disorderly transition scenario.
    • And it is equally true in light of the Treaty obligation for all EU institutions to integrate environmental protection in the definition and implementation of all their policies and activities.
    • Last but not least, the ECB has the obligation to mitigate risks, both in the area of banking supervision and when it comes to its own balance sheet.
    • [8] Importantly, the Treaties not only define obligations but also limitations to what the ECB can do.

The principle of market neutrality

    • In the public debate, the latter principle has often been equated with the concept of market neutrality[10], which is a core principle guiding the implementation of our private sector asset purchases.
    • Under the current interpretation of this principle, prevailing market structures as reflected in the issuance behaviour of firms are taken as given.
    • However, this interpretation of the principle of market neutrality is increasingly challenged on the ground that it may reinforce market failures that decelerate societys transition to a carbon-neutral economy and may therefore impede, rather than favour, an efficient allocation of resources.
    • [11] More generally, one may question whether the market is the appropriate benchmark in the presence of environmental externalities.
Chart 1

    Source: Papoutsi, Piazzesi, Schneider (2021). Data sources: ECB (SHS & CSDB), Eurostat, Orbis.
    • (2021) then compare the sectoral distribution of the market portfolio to the ECBs current holdings under its corporate sector purchase programme (CSPP)[15], highlighting a clear divergence in the portfolios sectoral composition.
    • [16] While the services sector is underrepresented in the ECB portfolio, the manufacturing, utility, automobile and transportation sectors are overrepresented relative to the market portfolio (Chart 2).
Chart 2

    Market portfolio vs. ECB holdings Source: Papoutsi, Piazzesi, Schneider (2021). Data sources: ECB (SHS & CSDB), Eurostat, Orbis.
    Based on Eurostat’s air emissions accounts by sector, the authors go on to show that the ECB’s portfolio distribution across sectors is positively correlated with sectoral emission shares, in contrast to the overall market portfolio (Chart 3).[17] Hence, the overrepresented sectors tend to be those with particularly high emission shares.
Chart 3

    Market portfolio vs. ECB holdings vs. sectoral emission intensity Source: Papoutsi, Piazzesi, Schneider (2021). Data sources: ECB (SHS & CSDB), Eurostat, Orbis. Notes: Market shares measured as capital income by sector. Emission intensity measured by Scope 1 air emissions by sector. “Dirty Manufacturing” = oil & coke, chemicals, basic metals,
    • The emission bias of the ECB portfolio appears to be driven by the underlying structure of the bond market.
    • The issuance behaviour of large firms in emission-intensive sectors systematically differs from firms in other sectors: they are more likely to enter the bond market, not least due to their high level of fixed assets that can serve as collateral.
    • The higher bond issuance by emission-intensive firms translates into a higher emission intensity of both the CSPP-eligible universe and the ECB portfolio (Chart 4).
Chart 4

    Market portfolio vs. ECB holdings vs. CSPP eligibility vs. bond market Source: Papoutsi, Piazzesi, Schneider (2021). Data sources: ECB (SHS & CSDB), Eurostat, Orbis.
    • In light of these empirical results, there is a case for considering how to mitigate the emission bias induced by the traditional market neutrality principle.
    • Proposals range from the exclusion of emission-intensive sectors to more sophisticated tilting approaches, which have the advantage of retaining incentives of the most emission-intensive sectors to reduce their greenhouse gas emissions.
    • [19] Beyond the net asset purchase phase, such approaches could still be applied to reinvestment under the asset purchase programmes.

Without prejudice to the objective of price stability

    • Importantly, such actions must not prejudice the primary objective of price stability as enshrined by the Treaties.
    • First, our climate-related actions must not impede the smooth functioning of monetary policy.
    • Second, the precedence of price stability over other objectives implies that if monetary policy needs to be tightened to achieve our price stability objective for reasons unrelated to climate change for example, because of underlying price pressures then we must not hesitate to act.
    • Climate change is, and will remain, only one among many factors shaping the inflation outlook relevant for monetary policy.
    • Strict adherence to our primary mandate is crucial in order to safeguard the legitimacy of our actions as an independent institution.

Conclusion

    • There can be no doubt that climate change requires urgent policy action.
    • One possible avenue for action is to incorporate sustainability criteria into the implementation of our private sector asset purchases.
    • At the same time, it has to be acknowledged that central bank policy cannot, and must not, replace government policies.
    • Monetary policy actions vary over the business cycle, while the effective mitigation of climate change requires permanent and structural measures, which only governments can provide.

Isabel Schnabel: From green neglect to green dominance?

Retrieved on: 
Thursday, March 4, 2021

Intervention by Isabel Schnabel, Member of the Executive Board of the ECB, at the “Greening Monetary Policy – Central Banking and Climate Change” online seminar, organised as part of the “Cleveland Fed Conversations on Central Banking”, 3 March 2021 Frankfurt am Main, 3 March 2021 Climate change is one of the biggest challenges that humankind is facing.

Key Points: 

Intervention by Isabel Schnabel, Member of the Executive Board of the ECB, at the “Greening Monetary Policy – Central Banking and Climate Change” online seminar, organised as part of the “Cleveland Fed Conversations on Central Banking”, 3 March 2021

    • Frankfurt am Main, 3 March 2021 Climate change is one of the biggest challenges that humankind is facing.
    • It is becoming increasingly clear that these risks will not materialise in the distant future but much faster than expected.
    • The tragedy of an alleged long horizon[2] is increasingly turning into a tragedy of having too little time to act.
    • This has been fully recognised by European policymakers who have made the European Green Deal a top priority.

The obligation to act

    • [6] This is true under the primary mandate if central bank actions are necessary in order to maintain price stability.
    • Emerging evidence suggests that climate change is poised to affect price stability and the transmission of monetary policy to the real economy, especially but not only in a disorderly transition scenario.
    • And it is equally true in light of the Treaty obligation for all EU institutions to integrate environmental protection in the definition and implementation of all their policies and activities.
    • Last but not least, the ECB has the obligation to mitigate risks, both in the area of banking supervision and when it comes to its own balance sheet.
    • [8] Importantly, the Treaties not only define obligations but also limitations to what the ECB can do.

The principle of market neutrality

    • In the public debate, the latter principle has often been equated with the concept of market neutrality[10], which is a core principle guiding the implementation of our private sector asset purchases.
    • Under the current interpretation of this principle, prevailing market structures as reflected in the issuance behaviour of firms are taken as given.
    • However, this interpretation of the principle of market neutrality is increasingly challenged on the ground that it may reinforce market failures that decelerate societys transition to a carbon-neutral economy and may therefore impede, rather than favour, an efficient allocation of resources.
    • [11] More generally, one may question whether the market is the appropriate benchmark in the presence of environmental externalities.
Chart 1

    Source: Papoutsi, Piazzesi, Schneider (2021). Data sources: ECB (SHS & CSDB), Eurostat, Orbis.
    • (2021) then compare the sectoral distribution of the market portfolio to the ECBs current holdings under its corporate sector purchase programme (CSPP)[15], highlighting a clear divergence in the portfolios sectoral composition.
    • [16] While the services sector is underrepresented in the ECB portfolio, the manufacturing, utility, automobile and transportation sectors are overrepresented relative to the market portfolio (Chart 2).
Chart 2

    Market portfolio vs. ECB holdings Source: Papoutsi, Piazzesi, Schneider (2021). Data sources: ECB (SHS & CSDB), Eurostat, Orbis.
    Based on Eurostat’s air emissions accounts by sector, the authors go on to show that the ECB’s portfolio distribution across sectors is positively correlated with sectoral emission shares, in contrast to the overall market portfolio (Chart 3).[17] Hence, the overrepresented sectors tend to be those with particularly high emission shares.
Chart 3

    Market portfolio vs. ECB holdings vs. sectoral emission intensity Source: Papoutsi, Piazzesi, Schneider (2021). Data sources: ECB (SHS & CSDB), Eurostat, Orbis. Notes: Market shares measured as capital income by sector. Emission intensity measured by Scope 1 air emissions by sector. “Dirty Manufacturing” = oil & coke, chemicals, basic metals,
    • The emission bias of the ECB portfolio appears to be driven by the underlying structure of the bond market.
    • The issuance behaviour of large firms in emission-intensive sectors systematically differs from firms in other sectors: they are more likely to enter the bond market, not least due to their high level of fixed assets that can serve as collateral.
    • The higher bond issuance by emission-intensive firms translates into a higher emission intensity of both the CSPP-eligible universe and the ECB portfolio (Chart 4).
Chart 4

    Market portfolio vs. ECB holdings vs. CSPP eligibility vs. bond market Source: Papoutsi, Piazzesi, Schneider (2021). Data sources: ECB (SHS & CSDB), Eurostat, Orbis.
    • In light of these empirical results, there is a case for considering how to mitigate the emission bias induced by the traditional market neutrality principle.
    • Proposals range from the exclusion of emission-intensive sectors to more sophisticated tilting approaches, which have the advantage of retaining incentives of the most emission-intensive sectors to reduce their greenhouse gas emissions.
    • [19] Beyond the net asset purchase phase, such approaches could still be applied to reinvestment under the asset purchase programmes.

Without prejudice to the objective of price stability

    • Importantly, such actions must not prejudice the primary objective of price stability as enshrined by the Treaties.
    • First, our climate-related actions must not impede the smooth functioning of monetary policy.
    • Second, the precedence of price stability over other objectives implies that if monetary policy needs to be tightened to achieve our price stability objective for reasons unrelated to climate change for example, because of underlying price pressures then we must not hesitate to act.
    • Climate change is, and will remain, only one among many factors shaping the inflation outlook relevant for monetary policy.
    • Strict adherence to our primary mandate is crucial in order to safeguard the legitimacy of our actions as an independent institution.

Conclusion

    • There can be no doubt that climate change requires urgent policy action.
    • One possible avenue for action is to incorporate sustainability criteria into the implementation of our private sector asset purchases.
    • At the same time, it has to be acknowledged that central bank policy cannot, and must not, replace government policies.
    • Monetary policy actions vary over the business cycle, while the effective mitigation of climate change requires permanent and structural measures, which only governments can provide.

Fabio Panetta: Mind the gap(s): monetary policy and the way out of the pandemic

Retrieved on: 
Wednesday, March 3, 2021

Speech by Fabio Panetta, Member of the Executive Board of the ECB, at an online event organised by Bocconi UniversityIn 2020, with the pandemic raging, the direction of policy support was obvious and the choices facing policymakers were relatively narrow.

Key Points: 

Speech by Fabio Panetta, Member of the Executive Board of the ECB, at an online event organised by Bocconi University

    • In 2020, with the pandemic raging, the direction of policy support was obvious and the choices facing policymakers were relatively narrow.
    • Monetary and fiscal authorities everywhere intervened to support the economy on a massive scale.
    • But in 2021, with the progress made on vaccine technology, policy choices have become less clear-cut.
    • As such, it might be tempting to conclude that there is less need for monetary policy support.
    • We will still face two prominent gaps that we need to close: the output gap and the inflation gap.
    • At present, the risks of providing too little policy support still far outweigh the risks of providing too much.

Eliminating downside risks

    • There is a good chance that a recovery will take hold in the latter part of this year.
    • But that is not a justification for policies to run on neutral.
    • First, in a dramatic crisis like this one, macroeconomic policymakers should not bank on the most favourable scenario materialising.
    • As I have argued elsewhere, the pandemic has produced an asymmetric balance of risks, which requires an asymmetric reaction function.
    • Just as we looked though temporary negative inflation in recent months, we will look through this transitory hump in inflation.
    • And this shallow growth path remains vulnerable to a series of downside risks.
    • This divergence will bring risks of its own: in fact, we are already seeing undesirable contagion from rising US yields into the euro area yield curve.
    • The risks to private consumption growth are therefore substantial.
Chart 1 Household financial situation and savings

    (change in percentage balance from January 2020 to January 2021)
    • Given the weak financial starting point of many firms, investment is likely to only increase gradually and cautiously.
    • [5] A risk management approach would therefore clearly call for policy to eliminate these risks and reinforce the central growth path.
    • And, if we were to do too much and push the economy onto a stronger growth path, that would in fact be a welcome result.

Closing the gaps faster

    • But the experience of the last cycle suggests that it is hard to lift inflation dynamics without demand testing potential more dynamically.
    • Despite several years of robust economic growth, the euro area economy might still have been operating with significant economic slack even on the eve of the pandemic.
Chart 2 Pre-crisis and recent estimates of the output gap in the euro area

    (% of potential output) Source: ECB staff calculations.
    • In the decade after the Lehman crash, yearly domestic demand growth in the euro area was almost 2 percentage points lower on average than it had been in the previous decade, and it was much lower than that of our main trading partners (Chart 3).
    • This contributed to compressing inflation persistently below our aim, leading to a significant price level gap (Chart 4).
    • [6] That was not the case in the United States or the United Kingdom, where domestic demand stayed on a stronger trajectory.
Chart 4 Harmonised Index of Consumer Prices (HICP)

    (all-items, January 1999=100)
    • This clearly called for action, as reflected in the additional support we decided on in December.
    • Boosting demand is also necessary to reduce hysteresis risks after the pandemic.
    • [8] Policy should not accept hysteresis as a reality which imposes new supply constraints, but rather explicitly set out to test those constraints.
    • [9] A tight job market also improves the outlook for future demand, thereby strengthening business investment.

Delivering the necessary policy stance

    • So the challenge we face is how to deliver the necessary policy stance.
    • Since the start of the pandemic, monetary policy in the euro area has gone through three phases.
    • In the first phase the phase of fragmentation the flexibility of our pandemic emergency purchase programme (PEPP)[10] averted an unjustified widening of spreads which would have disrupted monetary policy transmission.
    • In the second phase, the PEPP increasingly became a tool for steering the overall monetary policy stance.
    • This essentially means more focus on anchoring key financial variables above all, lending rates and the yield curve as key indicators of the monetary policy stance.
    • So, that constellation of financing conditions should be seen as the reference point for our policy moving forward.
Chart 5 Euro area real and nominal rates
    • In this way, we can prevent a tightening of financing conditions which would otherwise lead to inflation remaining below our aim for longer.
    • Eventually, firm commitment to steering the euro area yield curve may allow us to slow the pace of our purchases.
    • But in order to reach that point, we must establish the credibility of our strategy by demonstrating that unwarranted tightening will not be tolerated.

From policy fatalism to policy coordination

    • But counterfactual analysis shows that after the financial crisis and during the COVID-19 shock the ECBs expansionary policies have been highly effective.
    • Without our policies, inflation and GDP growth would have been dramatically lower and many more people would have lost their jobs.
    • Preserving favourable financing conditions will have a powerful effect on demand and inflation.
    • However, given the fall of the natural rate of interest,[14] monetary policy is more effective if deployed in sync with other policies.
    • Monetary, fiscal and structural policies must reinforce each other in order to cut slack and close the gap between saving and investment.
    • Fiscal policies continue to be a key channel for transmitting monetary policy to the real economy[15] and they are expected to remain supportive in 2021.
Chart 6 Euro area real and potential GDP

    (EUR billions)
    • They need to target investment in technology, education and infrastructure, creating an environment that bolsters growth and supports the sustainability of debt.
    • We have a joint interest in making the European economy more dynamic.
    • [16] NGEU is an important tool precisely because it ensures that common spending triggers growth-enhancing reforms that subsequently benefit all.

Conclusion

    • My main message today can be summed up with the title of a song by the electronic music duo Daft Punk[18]: Harder, better, faster, stronger.
    • The harder we push to close the output and inflation gaps, the better the outlook for the euro area economy.
    • Achieving this will require the right combination of monetary and fiscal support at the EU level, and it will require continued, determined reforms at the national level.

Luis de Guindos: Interview with Público

Retrieved on: 
Wednesday, March 3, 2021

Interview with Luis de Guindos, Vice-President of the European Central Bank (ECB), conducted by Sérgio AníbalIn 2020, inflation was 0.3% and, with the recovery of the economy, we projected in December that inflation would be 1% on average.

Key Points: 

Interview with Luis de Guindos, Vice-President of the European Central Bank (ECB), conducted by Sérgio Aníbal

    • In 2020, inflation was 0.3% and, with the recovery of the economy, we projected in December that inflation would be 1% on average.
    • In terms of this debate surrounding inflation, we need to take into account that there are forces at odds with each other.
    • On the one hand, we have the pandemics impact on the output gap, which shows that there is currently a lack of demand.
    • On the other hand, there is a great deal of monetary and fiscal stimuli, plus an increase in commodity prices and the recovery in world demand.
    • But in the short term, in the next 12 months, inflation will remain below our aim on average.
    • So, will the plans that the ECB had for the next few months remain unchanged?
    • We will have to see whether this increase in nominal yields will have a negative impact on financing conditions.
    • Yields are going up, but this is the case in both core and peripheral countries.
    • This will be the key factor over the coming weeks and months for our monetary policy, i.e.
    • understanding whether this increase in yields is due to trends in inflation or whether there are other factors that could hinder economic recovery.
    • Do you see a risk of a divergence between economies, which might trigger some degree of fragmentation in terms of access to financing?
    • We are using instruments classified as non-standard but which are becoming more conventional and will form part of any central banks toolkit.
    • But we need to be careful with respect to the side effects they could have, mainly in terms of financial stability.
    • Do you think that the moratoria may have a bigger impact on bank ratios in some countries than in others?
    • This is something that we have started to do with our non-monetary portfolio, which could be a first step.
    • Is this something you are doing because you are afraid of the potential effect that crypto-currencies could have on your monetary policy?
    • The main reason is that digitalisation has become increasingly relevant and the pandemic has accelerated the pace of digitalisation.
    • Over and above the doubts about the use of these assets, one of the issues raised is that they are very volatile instruments.

Fabio Panetta: Mind the gap(s): monetary policy and the way out of the pandemic

Retrieved on: 
Wednesday, March 3, 2021

Speech by Fabio Panetta, Member of the Executive Board of the ECB, at an online event organised by Bocconi UniversityIn 2020, with the pandemic raging, the direction of policy support was obvious and the choices facing policymakers were relatively narrow.

Key Points: 

Speech by Fabio Panetta, Member of the Executive Board of the ECB, at an online event organised by Bocconi University

    • In 2020, with the pandemic raging, the direction of policy support was obvious and the choices facing policymakers were relatively narrow.
    • Monetary and fiscal authorities everywhere intervened to support the economy on a massive scale.
    • But in 2021, with the progress made on vaccine technology, policy choices have become less clear-cut.
    • As such, it might be tempting to conclude that there is less need for monetary policy support.
    • We will still face two prominent gaps that we need to close: the output gap and the inflation gap.
    • At present, the risks of providing too little policy support still far outweigh the risks of providing too much.

Eliminating downside risks

    • There is a good chance that a recovery will take hold in the latter part of this year.
    • But that is not a justification for policies to run on neutral.
    • First, in a dramatic crisis like this one, macroeconomic policymakers should not bank on the most favourable scenario materialising.
    • As I have argued elsewhere, the pandemic has produced an asymmetric balance of risks, which requires an asymmetric reaction function.
    • Just as we looked though temporary negative inflation in recent months, we will look through this transitory hump in inflation.
    • And this shallow growth path remains vulnerable to a series of downside risks.
    • This divergence will bring risks of its own: in fact, we are already seeing undesirable contagion from rising US yields into the euro area yield curve.
    • The risks to private consumption growth are therefore substantial.
Chart 1 Household financial situation and savings

    (change in percentage balance from January 2020 to January 2021)
    • Given the weak financial starting point of many firms, investment is likely to only increase gradually and cautiously.
    • [5] A risk management approach would therefore clearly call for policy to eliminate these risks and reinforce the central growth path.
    • And, if we were to do too much and push the economy onto a stronger growth path, that would in fact be a welcome result.

Closing the gaps faster

    • But the experience of the last cycle suggests that it is hard to lift inflation dynamics without demand testing potential more dynamically.
    • Despite several years of robust economic growth, the euro area economy might still have been operating with significant economic slack even on the eve of the pandemic.
Chart 2 Pre-crisis and recent estimates of the output gap in the euro area

    (% of potential output) Source: ECB staff calculations.
    • In the decade after the Lehman crash, yearly domestic demand growth in the euro area was almost 2 percentage points lower on average than it had been in the previous decade, and it was much lower than that of our main trading partners (Chart 3).
    • This contributed to compressing inflation persistently below our aim, leading to a significant price level gap (Chart 4).
    • [6] That was not the case in the United States or the United Kingdom, where domestic demand stayed on a stronger trajectory.
Chart 4 Harmonised Index of Consumer Prices (HICP)

    (all-items, January 1999=100)
    • This clearly called for action, as reflected in the additional support we decided on in December.
    • Boosting demand is also necessary to reduce hysteresis risks after the pandemic.
    • [8] Policy should not accept hysteresis as a reality which imposes new supply constraints, but rather explicitly set out to test those constraints.
    • [9] A tight job market also improves the outlook for future demand, thereby strengthening business investment.

Delivering the necessary policy stance

    • So the challenge we face is how to deliver the necessary policy stance.
    • Since the start of the pandemic, monetary policy in the euro area has gone through three phases.
    • In the first phase the phase of fragmentation the flexibility of our pandemic emergency purchase programme (PEPP)[10] averted an unjustified widening of spreads which would have disrupted monetary policy transmission.
    • In the second phase, the PEPP increasingly became a tool for steering the overall monetary policy stance.
    • This essentially means more focus on anchoring key financial variables above all, lending rates and the yield curve as key indicators of the monetary policy stance.
    • So, that constellation of financing conditions should be seen as the reference point for our policy moving forward.
Chart 5 Euro area real and nominal rates
    • In this way, we can prevent a tightening of financing conditions which would otherwise lead to inflation remaining below our aim for longer.
    • Eventually, firm commitment to steering the euro area yield curve may allow us to slow the pace of our purchases.
    • But in order to reach that point, we must establish the credibility of our strategy by demonstrating that unwarranted tightening will not be tolerated.

From policy fatalism to policy coordination

    • But counterfactual analysis shows that after the financial crisis and during the COVID-19 shock the ECBs expansionary policies have been highly effective.
    • Without our policies, inflation and GDP growth would have been dramatically lower and many more people would have lost their jobs.
    • Preserving favourable financing conditions will have a powerful effect on demand and inflation.
    • However, given the fall of the natural rate of interest,[14] monetary policy is more effective if deployed in sync with other policies.
    • Monetary, fiscal and structural policies must reinforce each other in order to cut slack and close the gap between saving and investment.
    • Fiscal policies continue to be a key channel for transmitting monetary policy to the real economy[15] and they are expected to remain supportive in 2021.
Chart 6 Euro area real and potential GDP

    (EUR billions)
    • They need to target investment in technology, education and infrastructure, creating an environment that bolsters growth and supports the sustainability of debt.
    • We have a joint interest in making the European economy more dynamic.
    • [16] NGEU is an important tool precisely because it ensures that common spending triggers growth-enhancing reforms that subsequently benefit all.

Conclusion

    • My main message today can be summed up with the title of a song by the electronic music duo Daft Punk[18]: Harder, better, faster, stronger.
    • The harder we push to close the output and inflation gaps, the better the outlook for the euro area economy.
    • Achieving this will require the right combination of monetary and fiscal support at the EU level, and it will require continued, determined reforms at the national level.