Benoît Cœuré

SPEECH

The importance of trust for the ECB’s monetary policy

Speech by Isabel Schnabel, Member of the Executive Board of the ECB, as part of the seminar series “Havarie Europa. Zur Pathogenese europäischer Gegenwarten” at the Hamburg Institute for Social Research (Hamburger Institut für Sozialforschung)

• Frankfurt am Main, 16 December 2020 Ladies and gentlemen, Thank you for inviting me to join this seminar series.
• The seminar series Havarie Europa, literally translated as shipwreck Europe, touches on a topic that all proponents of European integration are forced to deal with time and again: euro-scepticism.
• At present, the coronavirus (COVID-19) pandemic is posing huge challenges for the European Economic and Monetary Union (EMU).
• European institutions and national governments have responded rapidly and comprehensively to mitigate the economic impact of the pandemic.
• In the long run, a high degree of public trust will ensure European institutions capacity to act.

The relevance of trust for central banks

• The trust of citizens in the ECB and public support for the euro are essential for the effectiveness of our monetary policy and the independence of the central bank.
• Why is public trust so critically important for central banks?
• Furthermore, stable money and public trust in central banks are essential to generate broad acceptance of their independence in the population at large.
• Independence protects central banks against political interference and thus underpins the credibility of monetary policy.
• By contrast, a lack of public trust can render the central bank more vulnerable to political pressure.
• The tasks carried out by many central banks have become more diverse, for instance in the areas of banking supervision and financial stability.
• Many central banks today perform important functions in the field of macroprudential supervision, which deals with questions of systemic financial stability.
• Since the financial crisis, central banks therefore face new challenges relating to their communication and accountability.

Trust in the ECB and the euro: empirical results

Public trust in European institutions and the ECB can be analysed using public surveys and empirical research.[3] The Eurobarometer survey offers a good basis for such an analysis, given that it provides data on trust in the currency union covering the entire period since its inception.

Descriptive analysis: trust in the ECB and the euro over time

• Trust in the ECB similar to trust in European institutions overall has declined in the years following the financial crisis.
• [4] Net trust, the difference between the share of respondents who trust the ECB and those who do not, has been almost continuously negative for nearly ten years (Figure 1).
• Figure 1 Net trust in the ECB and net support for the euro.
• At first glance, this divergence between a comparatively low level of trust in the ECB on the one hand and growing support for the euro on the other hand appears contradictory, since the ECB, as a European institution, is responsible for the single currency.
• It is therefore important to analyse this divergence more precisely by considering different euro area countries and groups in the population.
• [5] In terms of attitudes towards the ECB and the euro, four groups can be distinguished: monetary union sceptics (red), who neither support the euro nor trust the ECB; ECB-sceptics (yellow), who support the euro, but do not trust the ECB; euro-sceptics (blue), who do not support the euro, but trust the ECB; and monetary union supporters (green), who support the euro and trust the ECB (Figure 2).
• For the euro area as a whole, monetary union supporters represent the largest share of the population in most years.
• The share of this group reached its lowest point in 2014 in the wake of the European sovereign debt crisis, but has grown to around 40% since 2016 (Figure 3).
• Empirical data do, however, also show an increase in the share of respondents who support the euro but have no trust in the ECB.
• However, this overall picture for the euro area conceals heterogeneous developments in individual Member States.
• An analysis of empirical data at the country level suggests that attitudes towards the monetary union depend on economic developments.
• Countries that were severely affected by the financial crisis, such as Greece and Spain, experienced a relatively sharp decline in public support (Figure 4).
• By contrast, the number of monetary union supporters in countries less affected by the financial crisis remained at a relatively high level.

Descriptive analysis: trust in the ECB and the euro by socio-economic characteristics

• The analysis at country level provides initial indications that citizens perceptions of the economic situation influence their attitudes towards the monetary union.
• The consideration of individual socio-economic characteristics confirms this conjecture: survey data support the conclusion that citizens who assess the current economic outlook in Europe positively are more supportive of the monetary union (Figure 5).
• Monetary union supporters constitute the clear majority among those respondents who assess the European economic situation at the time of the survey as rather good or very good.
• Conversely, monetary union sceptics form the largest group among those respondents who perceive the economy to be in a very bad state.


A similar picture emerges when considering respondents’ personal financial situation. Those respondents who consider their own financial situation to be rather good or very good tend to be more supportive of the monetary union. Conversely, respondents with financial difficulties are more sceptical of the monetary union (Figure 6). Figure 6 Attitudes towards EMU by perception of the current economic situation of own household. Percentages

• People with a higher level of education are more likely to support the monetary union (Figure 7).
• For instance, manual workers and unemployed individuals display much lower levels of trust than white-collar workers and self-employed individuals.
• [10] Figure 7 Attitudes towards EMU by educational level (age upon completion of full-time education).


However, no systematic differences in trust in the ECB and the single currency emerge when comparing differences in trust among various birth cohorts (Figure 8).[11] Figure 8 Attitudes towards EMU by birth cohort. Percentages

Multivariate analyses: trust in the ECB and the euro

• The descriptive analysis of Eurobarometer data can only provide limited insights into the key factors that influence trust in the ECB and the euro.
• Multivariate analyses confirm the influence of socio-economic variables on individuals trust in the ECB.
• (2016) argue that the perception of future economic developments plays an important role: trust in the ECB grows with a more positive assessment of the economic outlook.
• (2010) find that factual expertise regarding the ECB is accompanied by greater trust in the institution.
• (2013) observe that there is a link between general support for EU institutions and trust in the ECB.
• [19] Studies also allow for a distinction to be drawn between those factors that affect trust in the ECB and support for the euro.
• Trust in the ECB, on the other hand, hinges more on the citizens satisfaction with the concrete performance of the EU and in particular its economic achievements.

Trust in the ECB during the pandemic – initial findings

• These insights highlight the importance of successful economic policy to sustain and strengthen citizens trust in public institutions in the long term.
• The severe economic crisis resulting from the COVID-19 pandemic is therefore a major challenge to citizens trust in the ECB, the euro and the European Union in general.
• At the beginning of the pandemic period, the ECB was confronted with a dramatically deteriorating situation in financial markets.
• The Composite Indicator of Systemic Stress (CISS) used by the ECB indicates that this policy response has averted a severe financial market crisis in the spring of 2020 (Figure 9).
• The ECBs crisis measures consist mainly of a new temporary asset purchase programme, tailored specifically to the pandemic crisis the pandemic emergency purchase programme (PEPP).
• In addition, the ECB provides ample liquidity to banks at highly favourable conditions, thus ensuring that they continue to lend to businesses and households in the euro area.
• The ECBs crisis measures thus ensure the smooth transmission of our monetary policy measures to the entire euro area.
• The economic consequences of the pandemic have especially affected those countries that already had relatively high debt levels prior to the crisis and where confidence in the ECB was rather low.
• It is undisputed that the large-scale monetary and fiscal policy measures cushioned the financial impact of the crisis significantly.
• However, it is still impossible to fully predict the impact on citizens trust in the ECB and the euro.
• The latest survey data can nevertheless offer some tentative, though rather sobering insights into how public trust has evolved over the course of the pandemic crisis.
• [23] By contrast, net trust in the ECB has fallen somewhat.
• Meanwhile, the latest survey results indicate that trust in national institutions seems to have increased over the course of the pandemic crisis (see Figure11).
• Indeed, according to early surveys, a majority of respondents in the euro area (61%) indicates satisfaction with the measures introduced by national governments.
• At the same time, respondents have split views regarding the measures taken by European institutions during the pandemic period: only 45% of respondents view the crisis measures implemented to date favourably.
• 88% are in favour of the EU drawing up an economic recovery plan to support all Member States.
• [26] According to many experts, the pandemic has demonstrated that European institutions, including the ECB, already have the capacity to effectively counteract an economic crisis in the euro area.

Measures to foster trust in the monetary union

What can European institutions take away from these findings?

Monetary and fiscal policy as a way out of the crisis

• Without a European policy response, Member States would have depended solely on their own fiscal space.
• The empirical findings suggest that such a divergence at country level would weaken trust in European institutions in some parts of the euro area.
• A common monetary policy is an integral part of the European crisis response as it underpins the economic recovery by ensuring favourable financing conditions and ample liquidity provision.
• This allows monetary and fiscal policy measures to complement and reinforce each other.

Long-term deepening of European integration

• The European fiscal and monetary policy response to the crisis can only be a starting point.
• Nevertheless, the crisis has been countered decisively by means of a policy response at European level in contrast to previous times.
• However, this does not alter the premise that a deepening of European integration would be important to support economic convergence in Europe, thus also increasing the effectiveness of our single monetary policy.
• On the one hand, there is a need for further European integration when it comes to the creation of common fiscal instruments at the European level and the reform of the fiscal framework.

Improving monetary policy communication

• A broad-based communication strategy is essential in our efforts to improve the publics understanding of the ECBs mandate and tasks.
• We must ask ourselves how we can ensure that our communication reaches all citizens across the entire euro area.
• Furthermore, our communication has so far largely focused on market participants and monetary policy experts this has done little to help the general public better understand monetary policy.
• The development of a more effective communication policy will therefore be a key topic in the context of our comprehensive monetary policy strategy review that we launched a few months ago.
• This dialogue will require us to engage with citizens expectations regarding the ECBs role and to evaluate what these expectations imply for the review of our monetary policy strategy.

Conclusions and outlook

INTERVIEW

Interview with CNBC

Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Annette Weisbach, CNBC, on 12 November and aired on 13 November

• The ECB Forum is always our big annual event, and we discussed all the big topics that are on the table.
• And both of those are playing a very important role in our ongoing monetary policy strategy review.
• And one of the important messages is that life has become more complicated for economic policy, including monetary policy and fiscal policy.
• From the central banking perspective, the biggest issue is the long-term decline in the natural real interest rate, which poses challenges.
• And these challenges already appeared years ago because interest rates were approaching the zero lower bound, which is now called the effective lower bound.
• This makes it difficult for central banks because they can no longer use conventional monetary policy tools and have to use unconventional monetary policy tools instead.
• But, as I said in the panel I was chairing today, the unconventional tools have become quite conventional by now.
• You have been talking about the possibility of cutting rates further into negative territory.
• We have always said that we are going to look at all the instruments.
• But there are reasons why we havent reduced interest rates in the past and now we have to check whether these reasons are still valid.
• One important argument is the effects that low rates may have on the banking sector.
• Therefore, I think we also have to discuss the intensity of our asset purchases, which is also important.
• So we have to ask: what is the intensity of purchases that is needed to preserve historically low financial conditions?
• Then there are others who are a bit more modest and who say that we should have a clear commitment to symmetry.
• And actually, symmetry is already always in our introductory statement, so this would be an easy thing to do.
• But youve not yet decided within the Governing Council on which is the best way to formulate an inflation target, right?
• We have regular meetings of the Executive Board, and especially of the Governing Council, in order to discuss all the background notes and analyses that are being produced.

SPEECH

The shadow of fiscal dominance: Misconceptions, perceptions and perspectives

Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the Centre for European Reform and the Eurofi Financial Forum on “Is the current ECB monetary policy doing more harm than good and what are the alternatives?”

• This means that the European Central Bank (ECB) pursues its monetary policy objectives, as defined by its mandate in the European Treaties, without being constrained by other considerations.
• The ECB is said to be one of the worlds most independent central banks.
• History is full of examples of high government debt eventually being resolved through higher inflation and financial repression.
• The fiscal framework of the European Union was meant to shield the ECB from fiscal dominance and protect its independence.
• In some euro area countries, public debt will increase to levels well above 100% (see right chart slide2).
• Central bank independence was already coming under close scrutiny before the pandemic, not only in the euro area.
• I will also argue that market failures imply a role for central banks in stabilising government bond market in times of stress.
• The third and final part opens up perspectives on the changed interactions between fiscal and monetary policy in a low-interest-rate environment and what it implies for the longer term.

ECB policies do not constitute “financial repression”

• The term financial repression typically refers to policy measures that aim at keeping interest rates artificially low, making it easier for governments to finance their debt.
• Financial repression can take many different forms, such as restrictions on capital movements or direct interest rate controls.
• More recently, however, the term is increasingly being used with respect to central bank policies, including asset purchases and negative interest rates.
• [4] History teaches us that financial repression typically crowds out private investment and thereby leads to lower growth and employment.
• ECB staff estimate that, in the absence of our sovereign bond purchases, as of the end of last year, real GDP growth would have been around 1.4 percentage points lower.
• [6] Rather, our measures aim to deliver financial conditions that are consistent with a return of inflation to our medium-term aim.
• [10] Today, however, financial markets and survey data do not suggest that people expect inflation to accelerate.

The disciplinary function of markets has not been lost

• Let me now turn to the question of whether sovereign bond markets are still performing their disciplinary role, in spite of the ECBs asset purchases.
• Although interest rates have fallen broadly across advanced economies in recent years, risk premia in euro area sovereign bond markets have not disappeared.
• The marked response of Italian sovereign bond yields to the 2018 episode of political instability, which by the way was not countered by monetary policy, underlines the disciplinary role played by financial markets.
• And when spreads have fallen, this often reflected improvements in fiscal fundamentals and relative growth performance.
• Portugals budget balance turned from a deficit of -4.4% of GDP in 2015 to a surplus of 0.2% in 2019.
• Euro area government bonds also consistently trade in line with their international peers when taking into account credit risk (see slide 8).
• On average, the risk premia of euro area government bonds are relatively close to those of other advanced and major emerging market economies.
• Hence, markets remain vigilant even though central banks have taken a more prominent role in government bond markets.
• The whatever it takes speech by Mario Draghi constituted a coordination device and thereby calmed markets, whereby the euro area gained precious time for reforms (see left chart slide 11).

The changed interaction between fiscal and monetary policy

• My final point relates to how the broader macroeconomic environment has led to a change in the way fiscal and monetary policy interact.
• Therefore, conventional monetary policy has much less space to stabilise the economy when required (see left chart slide 12).
• As a result, years of weak aggregate demand have forced central banks to introduce a wide range of non-standard monetary policy tools.
• In short, the effective lower bound on interest rates has become a feature of our monetary policy.
• The first consequence is that fiscal policy has become more important as a macroeconomic stabilisation tool.
• When natural rates are low and policy rates are constrained by the lower bound, a more accommodative fiscal policy is needed to lift the economy out of a low-growth, low-inflation trap.
• The reason is that such policies may boost potential growth and thereby increase monetary policy space in the future.
• [14] Calling on fiscal policy to play a more active role in macroeconomic stabilisation is not to be confused with modern monetary theory, which denies the governments intertemporal budget constraint.
• Once the economy has recovered and is back on a sustainable growth path, fiscal policy should take a backseat again and regain policy space.
• [15] One reason for this is that fiscal stimulus normally triggers expectations of a tightening of monetary policy, while at the lower bound investors anticipate a prolonged period of low interest rates, thereby accommodating the fiscal response.

Conclusion

INTERVIEW

Interview with Il Sole 24 Ore

Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Isabella Bufacchi on 8 June

• Italy is at the forefront as one of the hardest-hit countries, with less fiscal space and high public debt.
• How will Italys recovery out of the COVID-19 crisis be helped by the ECB, and by being a member of the euro?
• We had a pandemic, which is a common shock, and a common response from the ECB as the common central bank.
• This is very important since it is unlikely that individually all countries could have responded on the same scale.
• When this big shock arrived in the middle of March, the ECB responded decisively to stabilise financial markets because there was a huge dislocation.
• The ECB showed it could be an anchor of stability and prevent self-fulfilling dynamics that otherwise could have escalated.
• But when a shock is so large and uncertainty exceptionally high, it is difficult to have adjustments that are orderly and smooth.
• So it was very important for central banks in the world to step in to stabilise financial conditions.
• The stock markets are lower and the average sovereign yield for euro area Member States is higher than before the shock.
• Then the pandemic arrived, and our projections indicate that this shock is having a significant negative impact on inflation.
• And we also do not have now the imbalances in the euro area that we had in the last crisis.
• Yes, many new tools have been created to fight the pandemic: the European Stability Mechanism pandemic support, SURE, the recovery facility, PEPP.
• Monetary policies and fiscal policies are working in the same direction when these face a huge shock.
• The German Constitutional Court raised an issue on the risk that the ECBs monetary policy would get into the domain of fiscal policy