MNI INTERVIEW: German Wise Man Truger: ECB May Prolong PEPP

A weak and uneven euro area economic recovery may prompt the European Central Bank to postpone ending its temporary pandemic emergency asset purchase programme well beyond the currently-scheduled end date of next summer, a senior German government advisor told MNI in a video interview.

Achim Truger of the German Council of Economic Experts said he would be "happy" if the PEPP comes to an end in June 2021 as planned, but that any perceived failure of fiscal policy to distribute the recovery across the single currency bloc increases the likelihood of further monetary policy action.

Despite concern in some quarters that the lagged timescale in EUR750 billion European Rescue Fund disbursements to countries most afflicted by coronavirus risked a short-term liquidity shortfall, Truger was confident that the existence of the PEPP will avert the need for individual countries to ask the European Stability Mechanism for additional bail-out funds.

ONUS ON FISCAL

Even then, Truger does not believe that ECB monetary tools alone equip the central bank to meet its 2% inflation goal. While he welcomes the Euro 750 billion European Recovery Fund as an important move in the right direction, he argues that more fiscal ambition from Brussels will be needed.

It is "very clear that the ECB alone will never be able to boost the euro area economy," Truger said. Should fiscal policy fail to support growth sufficiently, the ECB can never expect to meet its inflation target of close to, but below 2% over the medium term sustainably "without using helicopter money, which would basically be fiscal policy," he added.

"We need a reconsideration of fiscal policy and a rebalancing between the macroeconomic policy instruments so that fiscal policy plays a larger role in that concern," Truger argued. "Without that I don't see a strong recovery and strong inflationary pressures."

It is, Truger said, "a hard time for fiscal hawks and monetary policy hawks, because there is no way to be strict on both fronts. You have to accept that either you need more expansionary monetary policy, with all the side-effects and the dangers that implies, or – somewhat more convincingly – you have to accept that this hawkishness on the fiscal side simply doesn't work."

COURT IN THE ACT

Truger sees the logic behind the German Constitutional Court's ruling in May, which called into question the Bundesbank's future participation in the ECB's longer-run asset purchase programme, as potentially extending the central bank's remit to embrace a Fed-style employment objective.

Describing the judgement as "weak [...] questionable, in a way extreme;" thought the court's focus on the side-effects of the ECB's use of non-standard monetary policy tools should have consequences. "…maybe the ECB mandate should be changed so as to consider much more on those side effects, just as the Fed has also the goal of maximum employment," he said.