Some brief considerations about the ECB
I have developed in the last few days some considerations about the ECB, which I thought could be of interest to my readers.
I have an out of consensus view about the next actions of the ECB. Most observers expect an uncontroversial decision at the next meeting to increase the size of the PEPP (400-500 bn), extending it from mid to end 2021, and possibly a further reduction of the rate on the TLTRO. While I also see the high probability of both moves, and in particular of the second one, I don’t think the decision will be unanimous. I see some of the hawks presenting in the Governing Council a J-curve view of activity in the €-area. According to this view, there are another couple of quarters of economic difficulties, but in the second half of 2021 the economic effects of vaccination will be felt, and we could see, as we saw in the third quarter of this year (+12.7 % with respect to the previous quarter) a sharp increase of activity. Since monetary policy has effects with a lag of 2-4 quarters, the effects of an easing now could come just when the €-area economy is sharply recovering. I don’t think this reasoning, which is at variance with recent statements from Lagarde and Lane, will win a majority in the Governing Council, also because inflation is very likely to remain subdued at least for a while longer. Still, I believe it will be supported by a minority. The effect of the split could be an easing only over a short horizon, i.e. the decreasing part of the J curve, without committing for a longer period, maintaining the flexibility to react to incoming information.
Something similar, I think, could happen in the US: the recovery could start at a brisk pace in the second quarter of 2021 and this outlook could likely keep the FED from attempting to increase policy accommodation.
On the fiscal situation in the EU, I am not terribly worried by the most recent developments regarding the Next Generation EU, in particular about the Polish-Hungarian veto. I think this is very worrying from a political point of view, but I expect that the economic damage will be limited to some delay in the program, which is, in my view, not dramatic since I see it more as structural rather than anticyclical. National anticyclical policies, however, are helped by the expectation of the EU fund: if it was not there, member countries with precarious debt situations, e.g. Italy, would find it much more difficult to carry out anticyclical fiscal policies. Regarding Italy, my view is that the current spread of Italian to German bonds, at 1.20 % is definitely on the low side and this generates the narrative that the solution to the Italian debt problem is to be found in Frankfurt, while I strongly believe that it basically has to be found in Rome.
Another, two, unrelated, points:
- It is unlikely that the ECB would add “fallen angels” to the corporate bonds it can purchase under QE,
- Andrea Enria, the head of the supervisory wing of the ECB, should definitely be added to the group of people one should look at to assess ECB policy, since his part of the ECB is clearly, and rightly, going beyond its micro-supervisory role to take a macroprudential one.