European Central Bank Executive Board member Fabio Panetta outlined a strategy in which the institution uses “unconventional flexibility” to keep borrowing costs low until government spending has helped push up inflation.
Panetta called on governments and the public to recognize that the current mix of fiscal and monetary stimulus is “clearly superior” to before the pandemic, when political leaders were focused on reducing debt.
“A return of macroeconomic policy to the pre-pandemic status quo would be an immense wasted opportunity,” he said at a conference of Mediterranean central bankers on Monday. “We should recognize that what was seen as unconventional in the past is now conventional.”
While Europe’s economy is picking up quickly as infections drop and pandemic restrictions are lifted, Panetta said it’s unclear how long the demand surge will last. That means it’s too soon to consider reining in support.
“We do not seem to be on track to ‘run the economy hot,’” he said.
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The ECB’s 1.85 trillion-euro ($2.2 trillion) emergency bond-buying program has been particularly beneficial in narrowing the differences in borrowing costs across countries, Panetta argued, suggesting that some of those powers might need to be kept when the temporary measure expires.
He also said the ECB will need use the verbal tool of “forward guidance” to pledge that it won’t undermine public-sector spending plans by creating uncertainty over when it will raise interest rates.
“This guidance creates a natural window for fiscal action,” he said. “Governments that spend wisely today can be assured that they will not be penalized with a premature rise in borrowing costs.”
The comments reflect a mounting campaign by the ECB to curtail any shift in the European Union toward reining in public support. President Christine Lagarde has said it’s too early to start a debate about exiting the central bank’s crisis tools, and told leaders last week that they need to “water the green shoots” of the recovery.
Executive Board member Isabel Schnabel last week warned politicians against starting a debate too soon about consolidating public finances.
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