Weidmann: An expansionary monetary and fiscal policy will in any case remain necessary for some time Interview with Bloomberg

Interview with Jens Weidmann conducted by Jana Randow.

The G20 has agreed to provide temporary debt relief to the world’s poorest countries; the IMF has approved the establishment of a short-term liquidity line to help address the shortage of dollars. Is this just the beginning of the international aid that will be available to help fight the coronavirus pandemic, or have negotiations shown that the agreements reached this week might already be the final word?

I am pleased that the IMF and G20 meetings have resulted in concrete solutions to help tackle this unprecedented crisis. The international community has been able to send an encouraging signal of unity in these difficult times. The time-bound suspension on debt service payments is indeed crucial to enable low-income countries to focus their scarce resources on the immediate crisis response. This will also buy time to examine more closely whether additional measures are necessary. Debt transparency is important in this context, not least in order to assess debt sustainability. The new short-term liquidity line is a special facility to support IMF member countries with very strong fundamentals which are facing potential liquidity pressures. I see this as an important addition to the IMF’s toolkit. Of course, the future course of the pandemic and economic developments are highly uncertain, which is why the G20 and the IMFC have said they are willing to explore further measures, if needed. 

The IMF has asked the G20 to support the creation of more special drawing rights, as it did during the 2008 financial crisis. France is strongly supporting this push and has floated an amount of $500 billion. The response from the US has so far been negative. Who do you think is right?

There are valid reasons for both sides of the argument. It is not a matter of who is right, but rather of weighing up the effectiveness and appropriateness of such a measure. On the one hand, any increase in SDRs would generate liquidity for the IMF’s members at a time when it is sorely needed by many countries grappling with the multiple shocks generated by this crisis. On the other hand, it is a rather blunt instrument, as the allocation would be distributed according to individual quota shares. The IMF’s Articles only permit general allocations to all member countries in the event of a global need to supplement existing reserves. Thus, most of the liquidity generated would end up in more advanced economies and not where it is needed most. Although proposals on how to deal with this exist, they all have their own – often legal – problems. This could lead to a laborious decision-making process, especially since an 85% voting majority is required. However, I think it is certainly wise to leave all options on the table at this point.  

Countries are starting to line out exit strategies from the lockdown, and what transpires is that restrictions are set to remain in place well into the second half of the year. Judging by your discussions over the past week, how likely is a rebound in economic activity this year – in Germany, the euro area and around the world? How big is the downside risk?

Uncertainty is exceedingly high at present. How the economy develops from here will very much depend on the spread of the pandemic and the action taken by governments to contain it. Individual countries and economic areas have been affected to differing degrees by the pandemic. The structure of their economies differs as well. All this will be reflected in economic developments. The IMF has mapped out a generally plausible scenario in its latest forecast, assuming that the pandemic will fade in the second half of the year and containment efforts can be gradually unwound. Then the economy will pick up steam again. At the same time, the IMF points to considerable downside risks. Arguably, a large-scale relaxation of the lockdown measures would depend on preventing infection with COVID-19 as far as possible and finding effective treatments for the virus. That is not generally expected before next year. Germany is now seeing the first tentative easing of the containment measures, with the prospect of additional easing to come. If contagion numbers are kept in check, economic activity will gradually regain momentum. However, for Germany – an economy that is highly integrated into the international division of labour – it is also important what happens in partner countries. 

Europe has proven in the past that progress is only made during existential crises. If Europe can’t agree on a joint fiscal response to an external shock of this magnitude, what does that mean for the future of the continent? Has the European project failed? When if not now will we see more fiscal integration?

First of all, Europe has at the ready crisis response mechanisms which can be utilised as well as expanded. It should also be noted that there is now significant, impressive fiscal impetus to which all levels are contributing. And the finance ministers have already signalled that further steps will be taken to get the European economy going again once the crisis ends. However, as per the EU’s design, the dominant force of the fiscal policy expansion is the national level, which is also largely responsible for economic and fiscal policy. I think Europe doesn’t need to conceal its response to the crisis, and I feel confident about the future of the European project.

Support measures announced so far may be enough to help the economy through the lockdown phase. How much more will be needed once shops and factories reopen – both in terms of fiscal expenditures and monetary stimulus? Could the ECB bypass the banking system and lend directly to those in need if it finds government support measures aren’t reaching the economy?

It is not yet possible to say for sure whether the measures taken to date will be enough. First and foremost, we need to get COVID-19 under control from a medical perspective. The decisive factors for economic developments will be the further course of the pandemic, the length of the lock-down and whether the measures taken successfully address liquidity and potential solvency problems facing firms and households. An expansionary monetary and fiscal policy will in any case remain necessary for some time. However, unlike in the case of wars or natural disasters, we are in a much better position to keep the loss to potential output low by designing a smart policy response, thus improving the conditions for the subsequent recovery. As far as the measures of the Eurosystem are concerned, under the purchase programmes for private issuers – i.e. for covered bonds, asset-backed securities and corporate bonds from non-banks – we are already specifically purchasing private debt instruments. And here, unlike with the PSPP, we are also active on the primary market itself. On the secondary market, the Eurosystem purchases bonds from government-backed entities, such as the KfW. The KfW issues, for example, quick emergency loans to small and medium-sized enterprises. I do not see the need for an even more active role for the Eurosystem as the very varied financing patterns of the different economies also need to be taken into account here. While there is a strong focus on the capital market in the United States, our systems in Europe tend to be bank-based. At the moment, banks are playing an absolutely crucial role in passing on government funds to those enterprises and employees in need.

Bond spreads are showing that tensions are already building up in the European periphery. Does that signal that governments have reached the end of what they can contribute to support their economies, and that the lion’s share of any rescue operations will fall once again on the shoulders of the ECB, and sooner than expected?

No. Monetary policy is making a major and important contribution within the scope of its mandate, and will continue to play its role. But it is clear that the other policy areas in particular have to step up in this situation. It must be clearly signalled that the necessary measures will be taken and that fiscal sustainability will be ensured in the long term. On the one hand, this calls for national solidarity. On the other hand, there is also the dimension of international solidarity. Of course, an extremely expansionary fiscal stance cannot be sustained permanently. The pandemic plainly shows how important a solid fiscal policy is. Going forward, then, all countries will have to focus on reducing the very high debt ratios and ensuring acceptance in the capital markets, and to do this in a way that is compatible with our fiscal rules.

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