ECB Must Limit Emergency Powers to Temporary Crises, Mersch Says
(Bloomberg) -- The European Central Bank risks legal trouble if it tries to extend the “emergency powers” of its pandemic bond-buying plan to its other asset-purchase program, according to Executive Board member Yves Mersch.
The 1.35 trillion-euro ($1.6 trillion) measure “has been created first and foremost to be a backstop,” Mersch, the ECB’s longest-serving policy maker, said in an interview at the institution’s Frankfurt headquarters on Monday.
“We have always said it is linked to the assessment of the Governing Council on how long this pandemic is affecting us,” he said. “So we cannot say the pandemic is over but we continue with the pandemic program, or we transfer the pandemic program features into the asset-purchase program. To my humble understanding of what the law means, this would be very curious.”
The comments offer a glimpse into potentially contentious arguments ahead. Mersch, a lawyer by training, is responsible for the ECB’s legal services. He has also been at the center of decisions since the single currency’s birth, as head of Luxembourg’s central bank from 1998 and then on the ECB’s six-member board from 2012. He’ll step down in December.
Policy makers already had a legal scare this year when Germany’s top court criticized the way they deployed their 2015 asset-purchase program, which is still running.
The pandemic tool, launched in March, is even more powerful. It can skew asset purchases toward stressed economies such as Italy because it is exempt from limits that aim to prevent monetary financing -- the funding of governments by the central bank -- which would be illegal.
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The Financial Times reported this week that a review of the emergency measure has started, and that some Governing Council members want to consider extending such flexibility to the older program.
Mersch, 70, said he was “not aware of such a development” and it could be problematic.
“It’s always easier to govern if you have emergency powers and you prolong the emergency powers forever,” he added. “We have disenfranchised ourselves from a certain number of self-imposed constraints in view of the pandemic and in view of its exceptional nature and threat -- and that means it must be temporary.”
Most economists and investors expect the pandemic program to be expanded again at December’s policy meeting, as economic growth slows and virus infections mount. Mersch -- long seen as a relatively hawkish policy maker -- said that decision will depend on the data, but so far the outlook is steady.
“Looking also at new incoming information, I think nothing is pointing to a further deterioration,” he said. “This is based on an assumption that things continue as they are right now, that there is no major deterioration on the health front.”
Mersch said the recovery’s trajectory might lie somewhere in between the ECB’s baseline scenario for only a partial pickup next year and its milder scenario, which shows a full rebound in 2021, “maybe with chances to come out a bit closer” to the better outcome.
Still, economic data on Wednesday failed to back that case. The recovery stalled this month as a renewed contraction in the services sector offset an upturn in manufacturing.
Mersch also noted that while the ECB has largely described its bond-buying program and long-term bank loans as the most effective stimulus measures right now, “we have never said that the interest rate is no more at our disposal.”
A rate cut has been floated by some economists as a way to rein in the euro, which has jumped more than 10% against the dollar since March and weighed on inflation by lowering import costs.
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Mersch stressed that the ECB doesn’t target the exchange rate, but acknowledged it is “obvious” that it affects the measurement of inflation and must be monitored.
The euro’s rise has been partly attributed to dollar weakness as a consequence of the Federal Reserve now targeting an average inflation rate of 2%, meaning it’ll probably keep U.S monetary policy lower for longer.
The ECB is reassessing its own goal of “below, but close to 2%” as part of a wide-ranging strategic review that should conclude around the middle of next year.
That will also include topics such as climate change that central bankers of Mersch’s vintage have never had to grapple with. On Tuesday the ECB announced that it’ll accept bonds linked to environmental targets in its refinancing and purchase programs.
Mersch welcomed involvement in green initiatives, though again with a word of warning.
“It’s a question of transition and a transition needs to be financed. It’s not all in the hands of central banks,” he said. “If we are pushing awareness that’s already a big contribution. If in the end central bankers are perceived as politicians, that would not be helpful in my opinion.”
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