The Netherlands’ central bank governor, Klaas Knot, has said the European Central Bank (ECB) should hold on its plan to hike interest rates and ditch quantitative easing in view of disappointing economic growth.
His statement signal a convergence over the bank’s ECB policy between fiscal “doves” and “hawks.” Knot is considered to be among the fiscal hawks who normally advocate for the normalisation of monetary policy. However, there is now a near consensus within the EU that the ECB should maintain historically low interest rates through the summer and perhaps well into 2020.
Given the economic slowdown, Knot cautioned that the current climate means there would be deflationary pressure. The ECB is committed to using revenue from maturing bonds to maintain the current level of sovereign bonds until the end of 2019. Asked whether the ECB should consider further bond-buying, Knot replied that he didn’t think the current situation warranted such a move.
Meanwhile, the President of the German Central Bank, Jens Weidmann, cautioned that “unelected bankers” should not overstep their mandate, but recognised that the crisis imposes dilemmas that need to be addressed on a political level and called for reforms that would address the “harmful sovereign-bank nexus.”
In July 2017, the Bundesbank published a report estimating how much each of the 19 members of the Eurozone had benefitted from the ECB’s bond-buying program. According to the Bundesbank’s own estimates, Italy was the prime beneficiary, but the Netherlands was a surprising second.
Knot cautioned that the ECB’s quantitative easing has eased pressure on the Eurozone members, but he also questioned the program’s effectiveness in battling inflation while also raising concerns over the unsustainable addiction to cheap liquidity in the banking sector.
The same argument has been made more subtly about sovereigns, particularly for Italy’s €1.9 trillion debt, as export-driven economies are now threatened by disruptions in global trade and may soon need financial support to counterbalance the lack of international demand. “Risks have to do with the external environment, particularly trade issues and the slowing down of growth in China,” Knot admits.
Weidmann and Knot have been considered as potential successors for Mario Draghi, whose second term as president of the ECB expires in the autumn.
Weidmann is a staunch critic of quantitative easing and does not seem to command the consensus required for the post. The economic affairs spokesperson for Italy’s ruling Lega party, Claudio Borghi, said in July 2018 that Weidmann was “inadequate” for the post, as his hawkish restrictive monetary and fiscal policy views were bad for Italy.
Kno, on the other hand, has been an overall supporter of Draghi’s “whatever it takes” approach to defending the Eurozone.
Other candidates include Banque de France chief François Villeroy de Galhau, ECB executive board member Benoît Cœuré, Estonia’s top central banker Ardo Hansson, Finland’s Olli Rehn, and Rehn’s predecessor at Finland’s central bank, Erkki Liikanen.