In a speech to the Stiftung Geld und Währung on Friday 7 June, Isabel Schnabel, member of the Executive Board of the European Central Bank (ECB), argues that monetary policy has not been “dominated by fiscal policy” in the euro area. In doing so, she seeks to refute the assertions of some observers that monetary policy is subordinate to fiscal policy and geared towards improving financing conditions for the States.
On the contrary, according to Ms Schnabel, the determined action taken by the ECB to pursue its mandate of maintaining price stability by raising rates and reducing its balance sheet is proof of the pre-eminence of monetary policy.
She felt that the ECB had succeeded in avoiding fragmentation within the euro area, without blurring the disciplinary effect of the financial markets.
Furthermore, she believes that the absence of a sustained rise in sovereign bond spreads after key rate hikes should not be interpreted as a sign that the ECB is keeping risk premiums artificially low by supporting sovereign bonds from highly indebted states.
She also felt that the flexibility of the PEPP emergency purchase programme had only been used temporarily to prevent sovereign bonds from moving in a disorderly fashion at the start of rate hikes. She pointed out that deviations from the ECB’s allocation key remained limited.
Ms Schnabel explained the low level of risk premiums in particular by the risk appetite of investors on the world’s financial markets.
In addition, she considered that the TPI monetary policy transmission protection instrument (see EUROPE 12998/13) was predominantly monetary. In her view, the targeted and conditional TPI has enabled the ECB to begin raising rates while maintaining, through safeguards (the instrument could not be activated, if necessary, to counter persistent tensions due to a country’s fundamentals), the discipline of the markets.
Finally, Ms Schnabel, who expressed concern about the debt levels of certain States, felt that the best guarantee against fiscal dominance was a fiscal policy that made it possible to take advantage of favourable economic conditions to consolidate public finances and that prioritised investment and structural reforms. She indicated that the new European economic governance framework would enable this balance to be achieved.
For further information, go to https://aeur.eu/f/clb (Original version in French by Émilie Vanderhulst)