ECB’s German policymaker sells stimulus to its hawks

ECB’s German policymaker sells stimulus to its hawks

Isabel Schnabel emerges as key ally for president Christine Lagarde in building consensus

The European Central Bank’s newest German policymaker is emerging as a crucial intermediary between its more conservative council members and president Christine Lagarde, who has vowed to seek consensus over its multitrillion-euro stimulus programme.

Isabel Schnabel, a former economics professor at the University of Bonn who became one of the ECB’s six executive board members a year ago, played a pivotal role in last month’s compromise which led to the expansion of its main stimulus programme, according to several members of its governing council.

The agreement was secured by presenting the ECB’s increased €1.85tn emergency bond-buying programme as a ceiling rather than a target; in public statements the central bank has emphasised that it might not use the full amount, but it could also raise it further, depending on whether it judges financing conditions to be favourable.

The finely balanced proposal helped to win widespread support on the ECB’s 25-person governing council, which sets monetary policy, despite its more conservative members having long been uncomfortable with bond purchases as a stimulus tool. One council member said Ms Schnabel had spoken to several of the “hawks” to persuade them of the advantages in the new approach.

“She was an important player — someone who is very articulate and very constructive,” said another council member. “The fact she is German means her views are often seen in that light, but I don’t find her that rigid.”

Criticism of the ECB has often been fiercest in Germany, where it is regularly accused of bailing out profligate southern European countries at the expense of prudent savers in the north — a view echoed in a ruling by the country’s constitutional court ruling last year.

Ms Schnabel has sought to explain the benefits of ECB policies to her fellow Germans. As head of the central bank’s market operations, she will also have a key role in implementing the new bond-buying approach. 

Any indication that Ms Schnabel is reining in the ECB’s main stimulus tool to avoid spending the full €1.85tn might please the council’s hawks but it would also threaten to trigger financial market jitters — as happened last week, when Italian government bond prices dipped to their lowest level since November.

Her work on drumming up the hawks’ support marks her out as a vital ally for Ms Lagarde in what many economists expect to be an increasingly difficult struggle to preserve unity on the governing council.

Unlike her predecessor Mario Draghi, who preferred to lead from the front and whose final easing measures in 2019 were marred by loud criticism from several council members, Ms Lagarde has established a more collegial approach.

This month she said she was keen to preserve a consensus in the council over its strategic review, which is tackling potentially divisive issues such as the inflation target and climate change, and is due to conclude in September. “I am particularly concerned about bringing the whole group together,” she said.

Economists predict this unity will become harder to maintain once vaccinations bring the pandemic under control and the eurozone economy starts to recover, helping to push inflation towards the ECB’s target of just below 2 per cent. 

Katharina Utermöhl, an economist at German insurer Allianz, said that after five consecutive months of negative inflation in the eurozone, the ECB was still in a “sweet spot”, able to cite the risk of deflation to justify its vast stimulus measures. But once demand bounced back and prices rose, that could become harder, especially if a two-speed recovery saw countries such as Germany rebound while others like Italy and Spain struggled.

“I expect the ECB to look through any rise in inflation this year and focus on the medium term, but it will be important to be very strong in communication and to maintain a consensus in the governing council to avoid any dissent,” Ms Utermöhl said.

Erik Nielsen, chief economist at UniCredit, said: “The peace [Ms Lagarde] brokered when she came in, and benefited from due to Covid-19, may well break down in the second half of this year assuming growth is then back.”

Ms Schnabel has already started preparing the ground for such a scenario. She said earlier this month that while “prices for services, such as travel or eating out, may soar on the back of the pent-up demand . . . such a short-term development should not be mistaken for a sustained increase in inflation, which is likely to only emerge very slowly”.

But there may be a flipside to Ms Schnabel’s growing influence; while she has been highly supportive of its crisis response, her instincts on monetary policy appear to be more conservative than many other council members.

A telling example of this was when Ms Lagarde fuelled a bond-market sell-off in the early weeks of the pandemic last March by saying it was not the ECB’s role to “close the spreads”, referring to the difference in funding costs between Italian and German bonds.

According to one council member, Ms Lagarde appeared to be echoing a statement by Ms Schnabel only hours earlier during a council meeting, in which she argued fiscal policy should shoulder the burden of addressing the crisis, rather than monetary policy.

A few years before Ms Schnabel joined the ECB, she questioned if it should wield such a “great deal of power” without much “parliamentary control”.

Now she has a front-row seat in shaping that power — including making the call on whether the emergency bond purchases need stepping up or dialling back to deliver its new benchmark of maintaining “favourable financing conditions”.