ECB tensions over how to combat coronavirus spill into open

The European Central Bank’s internal debate over how much it can do to combat the economic and financial chaos unleashed by coronavirus has burst into public view after it rebuffed comments by one of its own governing council members.

The ECB on Wednesday took the unusual step of issuing a statement to deny a claim by Robert Holzmann that its monetary policy had reached its limits. The outspoken head of Austria’s central bank also sits on the ECB’s top decision-making body.

“We cannot solve the problem on our own, this is now primarily a task for fiscal policy. It is the state’s responsibility to provide liability and social support. Monetary policy cannot cover up the problem,” Mr Holzmann said in an interview with Austria’s Der Standard newspaper.

In a one-paragraph statement the ECB said its governing council was in unanimous agreement that in addition to the easing measures it announced last Thursday it would continue to monitor the consequences of the pandemic and adjust its measures as appropriate “should this be needed to safeguard liquidity conditions in the banking system and to ensure the smooth transmission of its monetary policy in all jurisdictions”.

The rebuff underlined the intense debate within the top echelons of the ECB over how it should respond to the economic and financial crisis caused by coronavirus.

Its main decision-making body is made up of six executive directors and the heads of the 19 eurozone national central banks, making it bigger, more unwieldy and prone to division than its equivalents at the US Federal Reserve or the Bank of England.

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Last week the ECB gave itself more capacity to buy bonds issued by Italy and other eurozone countries by increasing its existing €20bn-per-month programme of asset purchases by an extra €120bn over the course of this year. It also beefed up the cheap loans it offers to banks and granted lenders various forms of capital relief.

But ECB president Christine Lagarde apologised to other members of the council for botching the communication of the decision.

Ms Lagarde said it was not the ECB’s role to “close the spread” in sovereign debt markets — referring to the gap between Italian and German bond yields that is a key risk indicator for Italy. That triggered a bond market sell-off, pushing Italian government bond yields — and thus Italy’s debt financing costs — up. Yields rise when prices fall.

Mr Holzmann said on Wednesday that Ms Lagarde’s comment had been “correct”.

Some council members think Ms Lagarde’s comment reflected her desire to heal divisions within the ECB that simmered for years under her predecessor Mario Draghi. These tensions erupted into the open in September after Mr Draghi’s last monetary easing package.

“You have to get a consensus; so you have discussions and to convince yourself that it is the right thing you have to buy the arguments of those who are on the other side of the table,” said one council member. “My perception is that she doesn’t really think that.”

Ms Lagarde told EU leaders this week that if the lockdown of many households and businesses continued for as long as a month it would knock 2 percentage points off the central bank’s forecast for eurozone growth of 0.8 per cent this year. If it lasted three months, the ECB estimates it would knock more than 5 percentage points off growth this year.

The forecasts leave the ECB under pressure to announce further steps to stem the economic and financial impact of the virus.

Olli Rehn, head of Finland’s central bank and an ECB council member, said on Wednesday the situation had become “much more critical than a week ago”.

“It is therefore necessary to take active steps, particularly to secure corporate finance and the functioning of the banking system as a whole. This could mean expanding the security purchasing programme and changing the national maximum bond purchase rates,” he told Finland newspaper Helsingin Sanomat.

Other ideas for how the ECB could bulk up its response to the virus include lifting its self-imposed limits on its asset-purchase programme or committing to buy more bonds, as well as a more extreme idea of committing to buy enough bonds to keep the yield on sovereign debt below a certain level.

In another possible step, Brussels officials are examining how the European Stability Mechanism, the region’s powerful €500bn bailout fund, could be used to support the euro area in conjunction with the ECB’s full firepower.

But all such policy ideas are likely to face opposition both from the hawkish minority of ECB policymakers as well as among some politicians, making them difficult for Ms Lagarde to impose without a fight.

Mr Holzmann is a professor who was made head of Austria’s central bank by the country’s rightwing Freedom party last year; he is widely seen as one of the most hawkish members of a group of ECB governing council members who would prefer a tighter monetary policy.

The last time the ECB publicly denied a statement by one of its own governing council members was in 2018 when it rebuffed claims by the former Austrian central bank governor Ewald Nowotny that it would raise its deposit rate before its refinancing rate, which caused the euro to appreciate.