He hopes that it will never be necessary to implement the new ECB anti-fragmentation instrument
MADRID, 17 Oct. (EUROPA PRESS) –
The Vice President of the European Central Bank (ECB), Luis de Guindos, has pointed out the importance of the fiscal policy of the governments not contradicting the monetary policy of the central bank, as has happened in the United Kingdom, which could increase the risk of market fragmentation.
In the opinion of the former Spanish Minister of Economy, who has intervened in an act of the General Council of Economists of Spain (CGE), fiscal policy can play an important role in the current circumstances, although he has warned that “the role cannot be identical to the one performed during the pandemic, when it was expansive.
“It is important that fiscal policy does not conflict with monetary policy,” he stated in reference to recent events in the United Kingdom, adding that fiscal policy has to be “selective” and focused on the most vulnerable.
In this regard, he stressed that, in the face of a possible incompatibility between fiscal and monetary policy, the markets may react by causing an increase in asset valuations, which in the case of the United Kingdom has forced the Bank of England to intervene.
“Decisions in recent days (in the United Kingdom) are in the direction of guaranteeing a fiscal policy compatible with the (monetary) normalization process and the Bank of England has acted with perspective on financial stability,” he explained.
In this regard, Guindos considers that fiscal policy, given the different circumstances of the economy and monetary policy during the pandemic, should avoid potential incompatibilities with monetary policy, focused on normalization to contain high levels of inflation.
In this way, the fiscal intervention of governments should not maintain the same bias as in the pandemic, even more so when public debt levels are currently much higher than then, so the economist recommends that it be “selective” and , in the case of the energy crisis, focused more on rents than on prices to facilitate the reduction of dependence on Russian energy and the energy transition.
“If we subsidize prices, we will be maintaining dependency and limiting the transition to green energy by eliminating the price signal,” he defended.
Likewise, without going into the particular cases of the countries, the ECB Vice President recalled that the decision to index pensions is a political issue of a social nature and that it has implications for the sustainability of the system.
In this sense, the Vice President of the ECB has reiterated the central bank’s concern with the risk of fragmentation in the debt markets of the euro zone, something that has always been present in the entity’s actions, including the design of its emergency purchases in the pandemic (PEPP) and now with the transmission protection instrument of its monetary policy (TPI).
“We are concerned and have always been concerned,” said Guindos, who expressed his confidence that the evolution of the markets finally justifies “not using the TPI” and that this is an instrument “that limits a priori (the risk of fragmentation ) without the need for its implementation”.
On the other hand, he highlighted the good situation of banks in the euro zone, which have increased their capital after the financial crisis and are in a better position to deal with the potential negative impacts of interest rate hikes.
In this regard, the Vice President of the ECB has warned that the risks to financial stability come mainly from investment funds, which have assumed more risk and reduced liquidity buffers, which, in a situation that combines economic slowdown and high inflation with interest rate hikes it can give rise to risks for the sector, as happened with the ‘family office’ Archegos.
