On Wednesday 13th May 2020, Room for Discussion had the honour to interview Philip Lane, chief economist of the European Central Bank (ECB). Lane is seen by many to provide an academic counterweight to the traditional political abilities of ECB President, Christine Lagarde. In this Room for Discussion interview, Lane answered some questions on the ECB policies in the face of the current pandemic as well as the future outlook of it.
Philip Lane became the ECB’s chief economist in June 2019. He studied at Trinity College Dublin and received a doctorate in Economics at Harvard University in 1995. He worked as an Assistant Professor at Columbia University and as a professor at Trinity College Dublin. Lane worked as an academic consultant for the European Central Bank, European Commission, International Monetary Fund, World Bank, Organisation for Economic Co-operation and Development (OECD) and Asian Development Bank, among others. Furthermore, before becoming chief economist at the ECB, he was the governor of the Central Bank of Ireland.
Philip Lane began talking about the medium-term monetary policy the ECB had planned before the pandemic hit Europe. The strategy, based on the forecasts done at the end of 2019, was focused on raising the inflation rate from 1%, as it had been for the past years, to 2%, which is the desired level by major banks. The crisis caused by COVID-19, however, has brought new dimensions to it. In view of a significant economic shock, Mr Lane explained, it is of major importance that central banks everywhere respond. A substantial decline in economic activity will most likely bring a significant decrease in inflation, which could go below the 1% that the euro area had before, or even lower, to negative values.
At the current state, there is a great risk of instability in the equity market and corporate bond market. Central banks should, therefore, stabilise the regular act of banks and markets by providing liquidity. Thus, to support the situation in the euro area face the corona crisis, the ECB has stepped up its existing programmes and increased liquidity. Furthermore, the ECB has been making sure that actions taken by banks are directed towards keeping credit flowing. Besides, they have launched the Pandemic Emergency Purchase Programme (PEPP), a €750 billion programme which intends to stabilise financial markets at risk of disruption and provide extra monetary accommodation needed to prevent inflation decreasing to negative values.
Mr Lane was later asked by one of the interviewees what drove the decision to inject €750 billion in the euro area as part of the PEPP “drastic programme”. The chief economist urged to put the numbers in context and added that he had to disagree with his characterisation of the scale. €750 billion, he explained, is 6% of the euro area’s GDP. An additional 6% is not an overwhelming injection, and the ECB tries to be “as forceful as needed but not to dominate the financial market.” Asset purchase, Mr Lane admitted, has come with certain controversy. It may seem an odd measure, but in fact, it has been widely used historically, and it is currently much needed. In a situation where the world economy and the European economy are at risk of deep deflation, central banks need to act swiftly. When interest rates handling is not enough, asset purchases are required.
But why exactly, the interviewees asked, is deflation problematic? In order to maintain economic activity, we people need incentives to spend today and not tomorrow. This could be achieved by offering low-interest rates, or by having a positive inflation rate, which would signal consumers that spending today is cheaper than spending tomorrow. Deflation is problematic because it reverses these incentives – it gives consumers a reason to spend tomorrow because they expect it to be less expensive in the future. When we make decisions, Mr Lane argued, it is always for now, because the ECB can always make a new decision, and policies can be adjusted as needed.
“One of the lessons learned from the global crisis is that it is important to move quickly. Central banks can always move quickly, and the risk is asymmetric: the risk of doing too little is hard to undo, but the risk of doing too much is a lot easier to fix.”
Mr Lane was further asked about the ECB’s position regarding the much-talked corona bonds. “It is not for us to say that such a scheme is necessary, that is for the preferences and negotiations of the member states.” Generally, the ECB tries to operate in line with what the European system decides. However, it is essential to recognise that the joint power of the European Union to raise debt together is very powerful. One of the fundamental reasons to have a euro area-wide bond, he continued, is that by having a single currency, the currency risk is eliminated. A joint bond would, therefore, be very popular among global investors. The old idea of Eurobonds, discussed during the 2010 crisis, was not very successful because the economic state of European countries was very different from each other. The notion of corona bonds is different because in this case, there is a common shock. Every country needs to heavily spend in order to recover. Thus, if member states were to agree on corona bonds, this would, in the aggregate, be a cheaper way to finance the recovery. However, he noted, the debate looks different in each individual country.
The final section of the interview touched upon the future outlook of the ECB’s monetary policy. Mr Lane explained that the euro area will be self-financing to a certain extent, but governments will remain relatively cautious. In this regard, he highlighted that it is essential to recognise that the situation we are facing now in Europe is very different from what we had ten years ago. Some forces are driving up inflation and some others driving it down, but the overall scheme is not as dramatic as we perceive it. In respect to the European Central Bank, Mr Lane concluded: “the ECB will do its job.”
Would you like to listen to the original interview? You can do so at UvA Radio. If you want to read more reviews on Room for Discussion interviews done by Rostra, you can check out our Room for Discussion section.