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The ingredients of ECB success will be boldness and clarity

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The writer, a former head of the IMF’s European department, is chief economic adviser at Morgan Stanley

The European Central Bank ended 2020 with a flourish, following up the successful stabilisation of markets with fresh measures to ensure easy financing conditions in the coming year. So is that the end of the line for monetary stimulus? What should we expect in 2021?

Three challenges will loom large at the ECB as the continent transitions to a post-vaccine, post-pandemic world: the problem of chronically low inflation; the tools to tackle it; and the link to climate policy. These may seem like long-term issues but are of acute interest to forward-looking financial markets as they bear on how long easy financial conditions might persist.

All three issues are to be taken up in a forthcoming strategy review, which is likely to be the ECB’s most consequential policy pronouncement in 2021.

First, the inflation challenge. Considering the ECB’s success in stabilising markets and holding the eurozone together, its failure to deliver on its core mandate — inflation “close to but under 2 per cent” — is remarkable. Inflation has been closer to 1 than to 2 per cent for seven of the past eight years, and markets expect that will be the case for the next decade.

The shortfall is not just a problem for debtors, who end up paying more in real terms than they bargained for. It is also a problem for a central bank effectiveness once expectations, in the face of systematic error in one direction, start to adjust.

Thus, the ECB may have succeeded in pushing down nominal interest rates, but since inflation expectations have also fallen, the decline in expected real rates — the key variable for savers and investors — has been more modest. Keep this up and a central bank loses all traction. Some commentators already bracket the ECB with the Bank of Japan, which lost control of its inflation anchor to become an institution perpetually at war with deflation.

Avoiding such a fate requires removing the ambiguity and ambivalence surrounding the ECB’s “close to but under 2 per cent” target. This has become a bigger issue since an influential minority in the ECB’s governing council has made clear it sees no problem in low inflation. The hawks favour a lower target range that would allow the ECB to declare victory and end monetary easing sooner. But lower inflation is the last thing a currency zone ridden with debt, wage rigidities and differing vulnerabilities needs.

Rather, the ECB should look to eliminate the “close to but under” clause attached to its current target. Alternatively, it could follow the US Federal Reserve’s lead in adopting an average inflation target, which, by encouraging expectations of above 2 per cent inflation in coming years, could counter the inflation pessimism that pervades Europe.

Second, the toolset. It is unclear if the strategy review will produce more than tweaks to the ECB’s asset purchase and credit subsidy programmes. A bolder move would be to expand into private asset purchases and revive short-term interest rates as an active policy tool. The latter was set aside in the belief that rates cannot be taken much below zero without harming banks.

But there are ways around the problem, and the prospect of a digital euro issued by the ECB, on which a small fee can be imposed, opens the door to more negative interest rates without undermining banks.

A more potent tool to raise inflation expectations involves breaking a taboo: co-ordination with fiscal policy. The proscription made sense in a world of robust growth, where any hint of collusion with fiscal authorities risked igniting inflation. But that world is long gone.

In the new secularly stagnating one, sustained public investment will be key to lifting demand, growth and inflation. The ECB has been supportive of fiscal expansion during the pandemic, but whether this stance will continue is unclear, placing question marks over inflation prospects. A more overt co-ordination with fiscal authorities, without underwriting profligacy or violating monetary financing of deficit rules, is well within the ken of the ECB.

Third, climate change. This is not an issue usually associated with central banking. But it has become relevant as green spending is a focus of the EU’s recovery fund.

Moreover, recognition of the financial risks stemming from climate change is growing. The ECB will need to go beyond insisting on transparency about climate risks in bank portfolios to actually incorporating these risks in its operations — be that in stress tests, capital requirements or eligibility for ECB asset purchases and collateral.

It is a well-worn trope in European policy circles that nothing changes outside of a crisis. If the ECB is to succeed in the coming decade, not just in 2021, it will need to prove itself the exception to that rule.



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Europe

FT 1000: Europe’s Fastest Growing Companies

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The latest annual ranking of businesses by revenue growth. Explore the 2021 list here — the full report including in-depth analysis and case studies will be published on March 22



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EU plans digital vaccine passports to boost travel

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Brussels is to propose a personal electronic coronavirus vaccination certificate in an effort to boost travel around the EU once the bloc’s sluggish immunisation drive gathers pace.

Ursula von der Leyen, European Commission president, said on Monday the planned “Digital Green Pass” would provide proof of inoculation, test results of those not yet jabbed, and information on the holder’s recovery if they had previously had the disease.

“The Digital Green Pass should facilitate Europeans‘ lives,” von der Leyen wrote in a tweet on Monday. “The aim is to gradually enable them to move safely in the European Union or abroad — for work or tourism.”

The plan, expected to be outlined this month, is a response to a push by Greece and some other EU member states to introduce EU “vaccination passports” to help revive the region’s devastated travel industry and wider economy. 

But the commission’s proposed measures will be closely scrutinised over concerns including privacy, the chance that even inoculated people can spread Covid-19, and possible discrimination against those who have not had the opportunity to be immunised.

In an immediate sign of potential opposition, Sophie Wilmès, Belgium’s foreign minister, raised concerns about the plan. She said that while the idea of a standardised European digital document to gather the details outlined by von der Leyen was a good one, the decision to style it a “pass” was “confusing”. 

“For Belgium, there is no question of linking vaccination to the freedom of movement around Europe,” Wilmès wrote in a tweet. “Respect for the principle of non-discrimination is more fundamental than ever since vaccination is not compulsory and access to the vaccine is not yet generalised.”

The travel sector tentatively welcomed the news of Europe-wide vaccine certification as a way to rebuild confidence ahead of the crucial summer season, but warned that regular and rapid testing was a more efficient and immediate way to allow the industry to restart.

Fritz Joussen, chief executive of Tui, Europe’s largest tour operator, said “with a uniform EU certificate, politicians can now create an important basis for summer travel”. But he added that testing remained “the second important building block for safe holidays” while large numbers of Europeans awaited a jab.

Marco Corradino, chief executive of online travel agent Lastminute.com, said he feared the infrastructure needed would not be ready in time for the summer season: “It will not work . . . at EU level because it is too complicated and would not be in place by June.”

He suggested that bilateral deals, such as the one agreed between Greece and Israel in February to allow vaccinated citizens to travel without the need to show a negative test result, had more potential.

Vaccine passport sceptics argue it would be unfair to restrict people’s travel rights simply because they are still waiting for their turn to be jabbed. 

Gloria Guevara, CEO of the World Travel and Tourism Council, said it was important not to discriminate against less advanced countries and younger travellers, or those who simply cannot or choose not to be vaccinated. “Future travel is about a combination of measures such as comprehensive testing, mask-wearing, enhanced health and hygiene protocols as well as digital passes for specific journeys,” she added.

A European Commission target to vaccinate 70 per cent of the bloc’s 446m residents by September means many people are likely to go through summer unimmunised.

While some countries around the world have long required visitors to be vaccinated against infectious diseases such as yellow fever, a crucial difference with coronavirus is that those inoculations are available to travellers on demand. 

Questions also remain about the risk of people who have already been vaccinated passing on coronavirus if they contract the disease.

 





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EU must prepare for ‘era of pandemics’, von der Leyen says

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Europe must prepare its medical sector to cope with an “era of pandemics”, the European Commission president said, as she warned the bloc was still in its most difficult period for Covid-19 vaccine deliveries. 

Ursula von der Leyen told the Financial Times that the EU could not afford to sit still even once Covid-19 has been overcome, as she described her plans for a Europewide fast-reaction system designed to respond more quickly to emerging medical threats. 

“Europe is determined to enlarge its strength in vaccine production,” she said in a telephone interview. “It’s an era of pandemics we are entering. If you look at what has been happening over the past few years, I mean from HIV to Ebola to MERS to SARS, these were all epidemics which could be contained, but we should not think it is all over when we’ve overcome Covid-19. The risk is still there.” 

Von der Leyen last month unveiled plans for a biodefence preparedness plan called the HERA Incubator, which will combine researchers, biotech companies, manufacturers and public authorities to monitor emerging threats and work on adapting vaccines. This will become part of a Health Emergency Preparedness and Response Authority (HERA). 

The concept is an attempt to mirror some of the benefits conferred by America’s Biomedical Advanced Research and Development Authority, which is charged with the job of responding rapidly to new health threats.

“The US has a strong advantage by having BARDA . . . this is an infrastructure Europe did not have,” von der Leyen said. “But Europe has to build up to be prepared for whatever comes, and also for the next possible pandemics. This is the HERA incubator.” 

The EU remains within its “most difficult quarter without any question” for vaccine deliveries, she said, cautioning “many, many problems” could always occur within the production process.

Looking towards the second quarter, she pointed out that a second EU contract with BioNTech/Pfizer for their vaccine would kick in, alongside the new jab from Johnson & Johnson, which is expected to be authorised in March.

In an EU summit on Thursday, von der Leyen addressed vaccine production and the threat of virus mutations after a rocky start to the year, when she was hit by complaints from politicians in member states, including Germany, about supply shortfalls. 

Von der Leyen acknowledged to the European Parliament in early February that mistakes had been made in the EU’s vaccination effort, and the campaign remains behind those of the US and UK. Among the difficulties are continued production problems at AstraZeneca’s European facilities. 

Von der Leyen said she was sticking with the EU’s target for the delivery of 300m doses in the second quarter, saying the challenge will shift from vaccine production to national rollouts. As for AstraZeneca’s shipments, she said: “I need to see the proof of the pudding . . . It’s very good that they also delivered from the rest of the world, but they have to honour their contract and we want our fair share.”

Ursula Von der Leyen says she is sticking with the EU’s target for the delivery of 300m doses of the AstraZeneca vaccine in the second quarter © Remo Casilli/Reuters

The good news for the EU is its access to mRNA technology, which is used in the BioNTech/Pfizer vaccine and which scientists believe can be used to rapidly adapt to mutations, said von der Leyen. 

But she also supported French president Emmanuel Macron’s proposal to share up to 5 per cent of supplies to permit the vaccination of healthcare workers in developing countries.

“We all suffer from the fact that the scaling up was not and is not as rapid as we thought at the beginning. This has a general effect all over the world,” she said. “With production picking up I think we should never forget that only if everybody has access to vaccines will we overcome this virus.”

Von der Leyen added that the EU needed to be particularly concerned about developments in its immediate area. 

“The mutant story is worrying me the most,” she said. “When the virus is still raging in the neighbourhood, the probability that mutants will occur, that will come back, for example, to Europe, is only rising.”



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