Guindos Joins ECB Officials Warning Against Policy Side Effects

(Bloomberg) --

Luis de Guindos joined the growing number of European Central Bank officials warning about the negative side effects of an ultra-expansionary monetary policy.

The vice president of the ECB also said policy makers alone can’t shield the euro-area economy from disruptive trade conflicts or the uncertainty generated by the U.K.’s impending exit from the bloc. He called on government leaders to step up efforts to counter the deepening economic downturn in the region, an argument that ECB officials are increasingly pressing.

“We’ve begun to notice that the collateral effects of this policy, of this monetary policy, are increasingly significant,” Guindos told a group of business people in the northern Spanish city of Bilbao. That’s one reason why monetary policy “can’t be the only response to the economic slowdown” in the euro area.

“Monetary policy can provide liquidity in the case of the risk of Brexit or trade wars, but it’s not the solution to these issues, which are the factors behind the slowdown,” Guindos said. “We can alleviate the situation but we can’t resolve it.”

While Governing Council members from Germany to the Netherlands have long criticized the ECB’s ever-more expansionary policies and highlighted associated risks, officials from the region’s south -- who are generally in favor of looser policy -- have lately joined the debate. Guindos’s remarks are the latest sign that a more substantial rethink of the institution’s strategy will take place under incoming President Christine Lagarde.

After years of unprecedented monetary stimulus, the ECB is getting closer to the limits of what it can do. The central bank cut interest rates to a record-low minus 0.5% in September and also announced a new round of quantitative easing in response to faltering economic growth and a deteriorating inflation outlook.

“I wouldn’t say that monetary policy has in any way reached its limits, but I would say that the negative impact on financial stability is increasingly evident, which means it needs to be complemented with fiscal policy,” Guindos said. The probability of a recession in Europe is minimal, he added.

The Spaniard, who served as finance minister before he joined the ECB, said officials at the Frankfurt-based institution are aware their subzero rates policy has both positive and negative effects.

“The advantage is that it has boosted investment, consumption and that’s behind the recovery” in the economy and the labor market, Guindos said.

On the negative side, there have been examples in some real estate markets in Europe of overly buoyant valuations of assets, and banks’ earnings have also taken a hit.

“That’s why we took mitigating steps to counter the negative effects,” Guindos said.

He pointed to low profitability of the region’s financial institutions as a risk to financial stability and said one potential boost would be more consolidation in the euro-area banking sector.

Despite some regulatory barriers to cross-border tie-ups between the region’s banks, it still needs to be a priority, he said.

To contact the reporter on this story: Jeannette Neumann in Madrid at jneumann25@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow, Paul Gordon

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