Robert Holzmann
Governor
Oesterreichische Nationalbank
SPEECH
Berlin, September 11, 2020
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To each crisis its analogy, to each analogy its critical reflection
Opening remarks Konrad-Adenauer-Haus
Ladies and gentlemen,
Throughout history, crises have been archetypal examples of moments when the power of analogy
overrides, at least temporarily, the inductive and deductive components of economic policy
decisions.1 The COVID-19 crisis, which has been severely affecting the global economy since
spring 2020, is no exception to this rule. The devastating human consequences of the Spanish flu
of 1918 led us to conclude that there need not be a trade-off between keeping mortality rates low
and economic activity up.2 The Great Depression of the 1930s taught us what a difference quick
and discretionary fiscal stimulus can make in the recovery phase.3 Finally, the Great Recession
following the financial market turmoil of 2008 showed that a monetary union like the euro area
needs strong monetary policy signals to ensure financial stability in the short term and prevent
financial market fragmentation and an impairment of monetary policy transmission in the medium
term.4
These are just a few examples of how, in the first few months of the current crisis, we let historical
analogies inform our policy responses - consciously or unconsciously. And let me be clear here:
This is a good thing. In times of crisis, pressure to act swiftly is high while there is little time for
deliberations and discussions. In such situations, analogies from history give us orientation we
would otherwise lack.
In economic policy, the time of drawing analogies must be followed by a time of reflection after
the crisis - not least to create a new basis for future action. Measures taken during a crisis, which
may be far-reaching in their consequences and may seriously distort market mechanisms, must be
subjected to thorough and comprehensive impact assessments (i.e. scientific evaluations) as soon
as the economy is back on track. This is the only way to prevent economists and policymakers
from cherry-picking historical analogies and succumbing to the habit of always "fighting the last
war."5 Let me therefore look ahead and briefly discuss the three challenges that will, in my
opinion, shape monetary policy in the euro area in the coming years.
The first challenge relates to the substance of our monetary policy objectives and tools. The
boundaries between what we call conventional and unconventional monetary policy, which had
already been quite hazy for some years, have been blurred even further by the COVID-19 crisis.
The standard belief that only urgent liquidity aid (i.e. lending of last resort) has an impact on the size
of central banks' balance sheets and that traditional monetary policy is synonymous with interest
rate policy has ultimately been debunked by the Great Recession. For quite some time now,
instruments like the ECB's targeted longer-term refinancing operations (TLTROs) have been
combining the provision of liquidity and the stimulation of aggregate demand in the euro area.6 In
the face of the COVID-19 crisis, central banks in some currency areas have even ventured farther
into new territories: The Federal Reserve and the Bank of England, for example, are granting
credit lines to previously noneligible debtors.7
Therefore, anticipating the end of the acute phase of the crisis, the first debate I think we should
be having now is about when and how we can achieve a structured, well-timed decoupling of
monetary policy from the current unconventional contingency measures. This debate will
eventually lead us to the even more fundamental question of whether the expansion of the
monetary policy toolkit seen over the past decade can and should be reversed. In times when it
could become structurally more difficult to achieve our medium-term price stability objective
merely by way of conventional interest rate policy, a broad debate about the future monetary
policy strategy, i.e. the interaction between instruments and objective, is very desirable. The
ECB's current strategy review provides a good and welcome opportunity to dive deeper into the
matter, with the recently concluded review of the monetary policy framework in the U.S.A.
serving as a source of potentially valuable input.8 The Governing Council of the ECB has
announced that the results of the strategy review will be presented to the general public in
mid2021. Furthermore, in the hope that we will soon be overcoming the current crisis, a discussion
about the timing of, and path to, monetary normalization is warranted.
The second point I'd like to raise is the interplay between monetary and fiscal policy, which the
current measures have moved back into the center of attention. COVID-19 has caused a severe
economic slump in all euro area countries, but the degree to which individual Member States have
been affected varies quite a bit. In such a situation, expansionary fiscal policies are a necessary
complement to the ECB's expansionary monetary policy course. This is especially true as we can
expect that it will take some time until we return to previous production and employment paths.
In addition to national measures, Next Generation EU (NGEU), the set of recovery measures
agreed at the European Council in July, will provide substantial and, above all, sustained fiscal
stimulus across Europe.9 This approach makes sense with a view to stabilization, but the design of
the funding measures may create wrong incentives: some countries that have been hit particularly
hard by the crisis did not even have much fiscal space prior to 2020 because of high public debt.
The challenge monetary policymakers are now faced with is ensuring that the boundaries between
monetary and fiscal policies are not blurred. Past crises have shown that the temptation of fiscal
dominance in phases of recovery with high public debt can be strong.10 We need to be looking at
ways to fend off any risks of fiscal dominance now, however small they seem, to prevent negative
implications for the independence, reputation, credibility and, ultimately, the effectiveness of
monetary policy. What we need first and foremost are clear rules, which are embedded in an
integrated way in the overall framework, that ensure that the financial commitments incurred by
the EU are covered by taxes, and recipient Member States use earmarked EU funds as intended.
This is the only way that EU funds can help structural growth gain notable momentum in all
Member States, and public finances can remain or become sustainable.
The third challenge I would like to talk about is the communication of our monetary policy
decisions and strategy in the euro area. The reason why I would like to put the spotlight on this
issue now is the ruling by the German Federal Constitutional Court of May 5, 2020. While this
ruling does nothing to diminish the effectiveness of our monetary policy, it still shows that we
need to communicate and explain our decisions to the broader public more clearly. In this context,
it is particularly important to explain more precisely what the principle of proportionality means
in our monetary policy and, equally important, what it does not mean. That said, I will not get
into any details that might anticipate the outcome of the current broad internal debate on this
issue, at least for as long as the ECB's strategy review is ongoing. Still, what I would like to make
clear is that the assessment of proportionality focuses on the effectiveness and proportionality of
our measures in relation to the ECB's legally defined objective as set out in the EU Treaty. Any
potentially negative side effects of nonstandard measures that may be deemed necessary to reach
this objective must always be kept in mind.
Side effects can take different forms: Very low key interest rates and extensive asset purchase
programs imply a low discount factor. Low risk-free interest tends to trigger portfolio shifts
toward assets that carry a larger amount of risk. Such shifts may, on the one hand, fuel investments
into the real economy and thus a recovery; on the other hand, they can drive up the prices of
different asset classes, including stocks, corporate bonds, real estate or gold. This can cause
financial market exuberance in the medium term, which in turn may cause risks to financial
stability.
A rise in certain asset prices can also have significant effects on the distribution of wealth. If we
take a holistic look at the distribution effects of unconventional monetary policy measures,
however, we also need to consider their impact on employment and economic growth.11
Last but not least, extended periods of very low financing costs may negatively affect productivity
growth. This can happen because of lower profitability thresholds for investments that cause
resources to be channeled into projects that are not profitable in the long term. What is more, if
financing costs are artificially kept at low levels, businesses may feel less pressure to innovate and
economize, and the market exit of unprofitable businesses may be delayed. If this were to be the
case, expansive monetary policy could weaken productivity and potential growth in the long run
- despite the growth-enhancing demand-side effects it has in the short term. That means that
monetary policy itself could also partially account for a decline in the natural rate of interest. In
other words: In such a scenario, monetary policy itself might push down its "benchmark" interest
rate, thus exacerbating the issue of the zero lower bound.
Let me conclude by summarizing and giving you some more poignant imagery:
•
In an acute crisis, all areas of economic policy immediately focus on short-term damage
control. But policymakers always need to keep in mind potentially harmful long-term
effects as well - and in particular how they might affect financial stability, productivity
growth or the relationship of monetary and fiscal policy. In other words: When putting out
a fire, let's not forget there might be water damage. That is also why, in my view, there has
been a shift in the attitude reflected in health policy measures taken to contain the current
pandemic - from a "whatever it takes" response in spring to the current more strongly
differentiated and balanced approach. Monetary and fiscal policy must likewise adopt a
differentiated perspective that balances different needs.
•
Now, as we find ourselves in the reconstruction phase after the crisis, we should clearly
focus on looking ahead. The post-COVID-19 world will most definitely look different from
the world we knew before. A future-oriented strategy should see reconstruction as a chance
for putting the economy on a new foundation. Hence, very appropriately so, the European
Commission has put the focus on a Green New Deal and the new digital economy. In this
situation, policymakers should be cautious not to make market-dominating companies even
stronger, but rather create conditions that will allow new up-and-coming businesses to
realize their innovative potential.
Thank you very much for your attention. I am looking forward to your questions and our
discussion.
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