At today’s meeting, the Governing Council of the European Central Bank (ECB) decided not to further expand its Pandemic Emergency Purchase Programme (PEPP). For the time being, purchases will continue as planned with a total envelope of 1,350 billion euros until June 2021. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

ZEW expert Friedrich Heinemann comments on the ECB Interest Rate Decision
Professor Friedrich Heinemann, head of the ZEW Research Department “Corporation Taxation and Public Finance” considers the crisis measures of the European Central Bank to be very effective in the short term.

“It is to be welcomed that the Governing Council does not increase the dose of its bond purchases at every meeting. At the EU summit this weekend, the ball is in the court of the EU and its Member States. They must come up with a much more convincing reconstruction plan than the Commission’s politically motivated ‘Next Generation EU’ recovery fund.

An effective EU plan could relieve the ECB of some of its responsibility for distressed euro countries. After all, the price that the ECB is paying for the billion-euro government bond purchases is already high. The purchases are making the balance sheets of the euro central banks increasingly dependent on euro countries that have become critically indebted. Having lifted all previously still existing limits in March, the ECB is also edging ever closer towards engaging in the kind of monetary state financing banned under EU law. In the acute phase of the coronavirus crisis, the Governing Council would therefore be well advised to consider the negative side effects of the PEPP more carefully.”

Further background information on the PSPP/PEPP in the ZEW expert brief 20-11

Previous Comments

The Ball Is Now in the Court of Fiscal Policymaker (12 March 2020)

The Ball Is Now in the Court of Fiscal Policymaker (12 March 2020)

The Governing Council of the European Central Bank (ECB) announced a comprehensive policy package, as the corona pandemic continues to cast a shadow over the dramatically declining inflation and growth expectations in the eurozone. Firstly, the central banks of the Eurosystem will expand their asset purchase programmes by 120 billion euros until the end of the year, focusing particularly on corporate bonds. In addition, new targeted longer-term financing instruments at negative interest rates will be put in place to boost liquidity among European banks with the aim of supporting bank lending to small and medium-sized enterprises, which will be particularly hard hit by the corona crisis. The key interest rates, on the other hand, remain at the current level. Professor Friedrich Heinemann, head of the Research Department "Corporate Taxation and Public Finance" at ZEW Mannheim, comments on the ECB's decision. 

“The stimulus package is well-balanced and takes advantage of the very limited options left to the ECB in order to mitigate the inevitable corona recession. By expanding asset purchases and targeted longer-term refinancing operations (TLTROs), the ECB aims to ensure bank lending to businesses that are particularly affected by the corona crisis. This is a sensible approach. Christine Lagarde made a smart move today by refraining from announcing another interest rate cut. Pushing interest rates even further into negative territory would not have helped, but would rather have exacerbated the situation of distressed banks.

Those hoping for a ‘whatever it takes’ moment from Christine Lagarde had unrealistic expectations in the first place. The economic crisis triggered by the virus cannot be contained by monetary policy measures. The ball is now in the court of fiscal policymakers. Fiscally sound Member States should therefore use their room for manoeuvre to prevent Europe from slipping into a dual crisis of the real economy and the financial economy. Ursula von der Leyen will now have to follow the lead of Christine Lagarde and negotiate a European stabilisation programme with the EU governments.” 

No Change of Mind in Sight Regarding Negative Interest Rates (23 January 2020)

No Change of Mind in Sight Regarding Negative Interest Rates (23 January 2020)

At its second meeting under the recently appointed ECB President Christine Lagarde, the ECB Governing Council decided to make no further changes to its monetary policy. This leaves the deposit rate at its current level of minus 0.5 per cent. Furthermore, the net purchase of assets with a monthly volume of 20 billion euros, which were taken up again in November 2019, will be continued. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on the Federal Statistical Office’s calculation.

“The opinion still prevails in the ECB Governing Council that, for the time being, the eurozone cannot do without the stimulus provided by negative interest rates and bond purchases. Only a truly substantial economic recovery could bring about a change of mind, but that is not yet in sight. In any case, the focus of monetary policy this year is not on interest rate decisions, but on the general review of the pursued strategy. The outcome of this review will determine whether the use of negative interest rates can be discontinued in about two years’ time or whether it becomes a permanent feature of euro monetary policy.”

Draghi’s Legacy Hampers the ECB Governing Council’s Fresh Start (12 December 2019)

Draghi’s Legacy Hampers the ECB Governing Council’s Fresh Start (12 December 2019)

At its first meeting under the recently appointed ECB President Christine Lagarde, the ECB Governing Council decided to make no further changes to its monetary policy. This leaves the deposit rate at its current level of minus 0.5 per cent. Furthermore, the net purchase of assets with a monthly volume of 20 billion euros, which were taken up again in November 2019, will be continued. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

“Given the improved economic figures, it would actually be about time to swiftly correct the rather hasty last decision made by Draghi to resume the asset-purchasing programme. It is understandable, however, that the new President prefers to take some time to reflect rather than make quick corrections. Towards the end, Mario Draghi’s term in office was characterised by his often impulsive decisions, a mistake Lagarde doesn’t want to repeat. Nevertheless, she will be forced to make decisions in the coming months.

When it comes to buying government bonds, the resources of states with low debt levels is gradually becoming scarce, with the result that it may become necessary to abandon previous limitations – i.e. the distribution of purchases among the eurozone countries according to the ECB’s capital key. With that said, the programme is edging ever closer towards a monetary financing of debt-ridden Member States, creating further controversy. Even though Mario Draghi is no longer sitting at the table, his legacy still hampers the ECB Governing Council’s fresh start.”

The Handover of Office Marks the Beginning of a Phase of Monetary Passivity (24 October 2019)

The Handover of Office Marks the Beginning of a Phase of Monetary Passivity (24 October 2019)

At its last meeting under the chairmanship of ECB President Mario Draghi, the ECB Governing Council decided to make no further changes to its monetary policy. This leaves the deposit rate at its current level of minus 0.5 per cent. Furthermore, from November 2019, the central banks of the Eurosystem will again start their net purchase of assets with a monthly volume of 20 billion euros. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on the ECB’s decision.

“The Governing Council’s meeting today was not expected to bring any real decisions. The handover of office from Mario Draghi to Christine Lagarde marks the beginning of a phase of monetary passivity used for reflection. After the Council’s controversial decision from September to lower the base interest rate and restart its asset purchases, Christine Lagarde will first concentrate on settling the disagreement in the Governing Council during Mario Draghi’s final phase. She is aware that such major conflicts, which seem to involve large sections of the ECB’s expert staff, ultimately undermine the acceptance of an independent central bank.

Nevertheless, we can expect to see important decisions on the future monetary policy perspective: First, Christine Lagarde will launch a process to review the monetary policy strategy, which may result in no less than a possible redefinition of the inflation target. Second, the ECB must provide the markets with credible arguments as to where the alleged scope for further monetary easing still exists. In concrete terms, this will also involve the question of whether the ECB, like the Bank of Japan, will include stock purchases in its range of instruments.”

A Heavy Burden for the New President (12 September 2019)

A Heavy Burden for the New President (12 September 2019)

At its meeting today, the Governing Council of the European Central Bank (ECB) has resolved to lower the base interest rate and to reduce the deposit rate from minus 0.4 to minus 0.5 per cent. The intensification of the negative interest rate will be supplemented by the introduction of a graduated interest rate system. In addition, the time horizon for the reversal of the negative interest rate regime has been extended for an indefinite period until the outlook for inflation is in line with the two per cent target. On top of this, the Council has decided to restart its asset purchase programme in November. Professor Friedrich Heinemann, head of the “Corporate Taxation and Public Finance” Research Department at the ZEW Mannheim, comments on this matter.

“The ECB was forced to act, as top decision-makers had created very high expectations of a further monetary easing in the past months. The planned package goes, however, far beyond the limit of what is acceptable. It is lamentable that the critics of bond purchases in the Governing Council were unable to assert themselves against the group around Mario Draghi. By launching a new round of bond purchases, the Governing Council is sending a dangerous signal to eurozone states like Italy, which can apparently count on receiving permanent financial aid from the ECB.

For the incoming ECB president, today's decision constitutes a heavy burden: she will have almost no room to manoeuvre and will be confronted with the overly high expectations as a result of Mario Draghi’s presidency that have led markets to believe in the omnipotence of the ECB.”

Zero and Negative Interest Rates for Years to Come (25 July 2019)

Zero and Negative Interest Rates for Years to Come (25 July 2019)

At its meeting today, the Governing Council of the European Central Bank (ECB) refrained from an immediate cut in interest rates. At the same time, it has decided to review all options for a further easing of monetary policy, including new bond purchases. Professor Friedrich Heinemann, head of the “Corporate Taxation and Public Finance” Research Department at the ZEW Mannheim, comments on this matter.

“It is to be welcomed that the Governing Council of the ECB has not yet lowered key interest rates further, and is first taking a period of reflection. This gives the impression of confidence and composure. Due to its signal function, an interest rate cut might even have fuelled concerns about Europe’s economy. Also, a further reduction in interest rates on the deposit facility will further harm the banking system, making considerations to mitigate the burden of negative interest rates all the more important.

At the same time, the Council’s statement today clearly signals that interest rate policy alone will not be sufficient to raise the inflation rate to the desired level. The purchase of new bonds is explicitly taken into consideration as a possible additional instrument. So even though the ECB has not indulged in dangerously impulsive behaviour today, the message remains unambiguous: The ECB will continue to pursue its policy of zero and negative interest rates for years to come, probably in combination with new bond purchases.”

Euro Countries in Deficit Procedures Should Be Excluded from Bond Purchases (6 June 2019)

Euro Countries in Deficit Procedures Should Be Excluded from Bond Purchases (6 June 2019)

At its meeting today, the Governing Council of the European Central Bank (ECB) postponed the earliest possible date for an initial interest rate hike until mid-2020. In addition, the Council decided on details for a new series of targeted longer-term refinancing operations (TLTRO III). Professor Friedrich Heinemann, head of the “Corporate Taxation and Public Finance” Research Department at the ZEW Mannheim, comments on the ECB’s latest decision.

“The ECB is finding itself in an increasingly difficult position. In view of the escalating trade conflict, the central banks of New Zealand and Australia have already lowered their key interest rates, while the US Federal Reserve has started preparations for an interest rate cut in its statements. By contrast, with a deposit rate of minus 0.4 per cent, the ECB no longer has any significant room for manoeuvre in its interest rate policy. The fact that the euro inflation rate is now starting to slip has increased the pressure to act to such an extent that Mario Draghi cannot simply remain inactive and ride this out until the end of his term in office.

The ECB President and his new chief economist Philip Lane would be well advised to think more carefully about alternatives instead of going back to purchasing government bonds on a broad scale. A return to the bond purchase programme under the old conditions would send a completely wrong signal to Italy, which has just been called to order by the European Commission with its recommendation to start a deficit procedure against the country. If the ECB now signals to Italy that it will de facto continue to finance the country’s deficits for many years to come, this will further encourage fiscal irresponsibility.
 
However, there would be a simple solution to this conflict: When renewing the programme, the ECB should exclude euro countries from bond purchases that are subject to ongoing excessive deficit procedures. This would demonstrate its ability to take monetary policy action without being further suspected of accommodating over-indebted euro states with transfers.”

Latest Developments Are Likely to Spark a New Debate on Additional Bond Purchases (10 April 2019)

Latest Developments Are Likely to Spark a New Debate on Additional Bond Purchases (10 April 2019)

Following last month's decision against raising its key interest rates for the first time this year, the European Central Bank (ECB) has now decided to make no further changes to its monetary policy outlook for the time being. Professor Friedrich Heinemann, head of the "Corporate Taxation and Public Finance" Research Department at the ZEW Mannheim, comments on the ECB's latest decision.“

The ECB is facing increasing risks. The chaos surrounding Brexit and Italy’s recession are putting a further strain on the economic outlook for the eurozone. On top of that, both the inflation rate and inflation expectations have been on the decline for some time now. This will further postpone a turnaround in interest rate policy. As a result, the ECB Governing Council will most likely shift its focus to mapping out the details of new long-term bank loans. In addition, these latest developments will most likely spark a new debate regarding the central bank purchasing additional bonds.

ECB President Mario Draghi recently assured that the ECB is by no means short of instruments to meet its objectives. In this regard, however, many observers are wondering what instruments he might have referred to, which would not entail serious side effects for the economy.”