Luis de Guindos: Presentation of the European Central Bank
Annual Report 2020 to the Committee on Economic and Monetary
Affairs of the European Parliament
Introductory remarks (by videoconference) by Mr Luis de Guindos, Vice-President of the
European Central Bank, to the Committee on Economic and Monetary Affairs of the European
Parliament, Frankfurt am Main, 14 April 2021.
* * *
Introductory remarks by Luis de Guindos, Vice-President of the ECB, at the ECON
Committee of the European Parliament (by videoconference)
Frankfurt am Main, 14 April 2021
Madam Chair,
Honourable Members of the Committee on Economic and Monetary Affairs,
Ladies and gentlemen,
I welcome the opportunity to appear before this Committee to present the ECB's Annual Report
1
for 2020. Today we will also publish the feedback on the calls and requests contained in your
2
resolution on our previous Annual Report.
This has been an exceptionally challenging year for all of us. The global coronavirus (COVID-19)
pandemic has triggered an unprecedented crisis, creating social, political, economic and
financial challenges for Europe and the rest of the world.
Therefore, allow me to focus my remarks first of all on the evolution of the economic outlook and
the subsequent monetary policy decisions taken by the ECB. Second, I would like to discuss in
more detail the impact of the pandemic on the European financial sector.
The economic outlook and the ECB's decisions
After 2020 saw the largest contraction recorded in post-war history, the euro area economy is
expected to recover in 2021. Meanwhile, the extended containment measures continue to weigh
on short-term activity, particularly services. Social distancing measures and high uncertainty
regarding employment prospects continue to weigh on consumer confidence, which remains
below its pre-crisis level despite a recent uptick. In contrast, private investment now appears to
be rather resilient and business confidence points towards growth in manufacturing activity.
Broad economic activity should pick up strongly in the second half of this year thanks to
vaccinations, the easing of confinement measures and monetary and fiscal policy support in both
the euro area and the rest of the world. Still, uncertainty remains high and the recovery is
expected to be fragile, with GDP only reaching its pre-crisis level in the second quarter of 2022
according to the March 2021 ECB staff projections. A successful vaccination campaign in the
entire euro area appears to be crucial in order to prevent downside risks from materialising.
Inflation as measured by the Harmonised Index of Consumer Prices increased measurably at the
beginning of this year, mostly due to temporary and technical factors. Headline inflation is likely to
increase in the coming months, but some volatility is expected throughout the year. Due to weak
demand and significant slack in labour and product markets, underlying price pressures remain
subdued. Our March staff projection exercise confirms that the medium-term inflation outlook
remains below our inflation aim.
At its latest monetary policy meeting in March 2021, the Governing Council conducted a joint
assessment of the inflation outlook and of the prevailing financing conditions, looking in particular
at the recent increase in risk-free interest rates and sovereign bond yields. The Governing
Council judged that, if left unchecked, this increase could cause a tightening of the wider set of
financing conditions that we monitor, as banks use those rates as key reference points for
determining credit conditions for households and firms. Such a tightening would have been
premature, given the still fragile state of our economy, and inconsistent with the ECB's
commitment to counter the downward impact of the pandemic on the projected path for inflation.
As a result, we decided that purchases under the pandemic emergency purchase programme
(PEPP) over the next quarter would be conducted at a significantly higher pace than during the
first quarter of this year. We also confirmed to conduct net asset purchases under the PEPP
with a total envelope of €1,850 billion until at least the end of March 2022 and, in any case, until
the Governing Council judges that the coronavirus crisis phase is over. At the same time, we
continue to stand ready to adjust all our instruments as appropriate to ensure that inflation moves
towards our aim in a sustained manner, in line with our commitment to symmetry.
The impact of the COVID-19 pandemic on the European financial sector
Let me take this opportunity to discuss in more detail the impact of the pandemic on the financial
sector - which is one of the key topics of the ECB Annual Report this year - and the challenges
Europe will face in the recovery phase.
The spread of the COVID-19 pandemic during 2020 led to a sharp increase in financial stability
vulnerabilities across markets and sectors.
Confronted with these challenges, governments deployed crucial measures to support firms and
3
households. Micro- and macroprudential authorities complemented these efforts , sending a
strong signal to banks that they should make use of their existing capital buffers to continue
providing key financial services and absorb losses while avoiding abrupt and excessive
deleveraging that would be harmful to the economy. The support from governments and
prudential authorities together with the ECB's monetary policy measures has preserved financial
stability so far and ensured a smooth flow of credit to the economy.
Although policy support has been successful in containing immediate financial stability risks,
medium-term vulnerabilities remain high. The pandemic has amplified pre-existing imbalances
and created new challenges.
For example, the profitability outlook for banks remains weak as lower-for-longer interest rates
dent margins and structural challenges persist. In addition, corporate sector vulnerabilities have
increased, and higher corporate default rates are to be expected once policy support measures
are withdrawn. This would lead to the quality of banks' assets deteriorating, resulting in another
challenge for these institutions in the coming period.
The forceful response of fiscal, monetary and prudential authorities has reduced the economic
and social costs of this crisis and created a virtuous circle between sovereigns, banks and
corporates. The measures introduced have stabilised demand, ensured the flow of credit to
firms, avoided a wave of corporate defaults and protected banks' balance sheets. However, they
have also increased interdependencies among various parts of the economy, which could lead to
the emergence of a negative feedback loop between existing vulnerabilities.
Authorities therefore face a delicate balancing act. On the one hand, an early withdrawal or
scaling back of support risks triggering a wave of insolvencies that would have a large impact on
the economy and banks' asset quality. On the other hand, providing public support and low
financing costs for too long may result in unviable corporates being kept alive to the detriment of
banks' viability, economic productivity and, by extension, economic growth.
At the moment, risks from the early withdrawal of policies are higher than the risks associated
with keeping support measures in place. We need to preserve the virtuous circle we have
created. However, any negative longer-term effects from keeping support measures in place
need to be carefully and continuously monitored.
Conclusion
In the short term, all stakeholders, particularly fiscal ones, must keep complementing our
accommodative monetary stance. If we want a timely recovery in Europe, we have to avoid any
cliff effects from the premature scaling back of these policies. It is therefore of the utmost
importance that the NextGenerationEU plan becomes operational without delay, as it would allow
Member States to restart their economies, enhance their resilience and foster innovation.
Looking ahead, we need to build solid foundations for robust and resilient economic growth,
combining national priorities with EU objectives. Moreover, completing the banking union and
deepening the capital markets union are the best policy tools we have at our disposal to ensure
that the EU financial sector is conducive to fostering long-term growth and that it embraces all
the opportunities offered by the digital transformation and the transition to green technologies.
Thank you for listening. I now stand ready to answer your questions.
1
ECB Annual Report 2020.
2
Feedback on the input provided by the European Parliament as part of its resolution on the ECB Annual Report
2019.
3
Specifically, ECB Banking Supervision allowed banks to temporarily operate below the level of capital defined by
Pillar 2 guidance and the combined buffer requirement and recommended that banks refrain from making
dividend payments and share buy-backs. On the macroprudential side, several national authorities either
announced a full release of countercyclical capital buffers or revoked previously announced increases to these
and other buffers.