global perspectives

Europe: populism, ECB succession and that empty toolkit

Europe: populism, ECB succession and that empty toolkit
Salman Ahmed, PhD - Chief Investment Strategist

Salman Ahmed, PhD

Chief Investment Strategist

How is populism expected to shape Eurozone institutions?

How could the succession of the ECB President impact monetary policy?

What policy options are available to the ECB, given the perception of an empty toolkit?

Salman Ahmed, LOIM Chief Investment Strategist, addressed these issues when he spoke to the UBS CIO Global Investor Forum about Europe.

On populism shaping Eurozone institutions

“This could be the first time we see populism starting to shape the mandates of key institutions. Populist parties are expected to win 30% of the vote in the European elections1 and if there is another crisis, this share is likely to rise.”

“We already see a discussion about the likely next ECB (European Central Bank) chair, so we see populism impacting key institutions. Everyone is aware that the ECB is out of options if a severe downturn happens. If populism rises and threatens the ECB’s mandate, what can they do to reduce the probability of that? It seems likely that policymakers’ dovishness is likely to become much more embedded and is, in fact, the only guarantee that this European project works going forward.”

“If we have a hawkish shift at the ECB, combined with populism and an economic downturn, that would be very damaging for the Eurozone.”


Regarding ECB succession and stance

“If the Germans don’t win the European Commission presidency, then who will they get [in a key EU leadership position]? That has implications for the ECB chair and could mean a structural change for how the ECB approaches its policy framework.”

“I’m skeptical that having a German, per say, is a structural shift towards ECB hawkishness. What we may have is that, on the margin, the view is taken a bit more hawkishly. The critical test is when the next crisis happens. Right now the policy set-ups are there, the calibration is there. So to be able to get out of that, you need to look at your inflation numbers, and they are nowhere near target. I’m not quite sure what narrative anyone will have to justify a shift in stance from dovishness.”


ECB policy options

“The ECB toolkit looks empty, even when non-traditional policies are included. TLTRO2, tiering or easing deposit rates3 – these measures are not “hitting the ballpark” manoeuvres, they’re more signaling mechanisms to say the ECB will support growth and indirectly produce forward guidance that rates are not rising anytime soon.”

“If the ECB want a proper bazooka this time, they will have to consider targeted lending to certain sectors of the economy. Populists came to the fore because of inequality. So the debate has to start in monetary policy circles that QE programmes had a massive impact on inequality and that shaped political outcomes. They have to take responsibility for that.”

“We could see targeted credit lending that extends the TLTROs to the logical next step that is a focus on SMEs [small and medium-sized enterprises] or lower-income segments.”

“If the next crisis happens, money finance fiscal policy has to come on the table. I don’t see any other policy option left that will have a huge impact on growth."



1 Populist parties won roughly 25% of vote in the European parliamentary elections on May 26, 2019.
2 Targeted longer- term refinancing operations, or TLTROs, are low-cost loans of up to 4-years to European credit institutions.
3 Tiering refers to the ECB tiering between its different interest rates to offset the side-effects of its ultra-easy policy. It could reportedly involve exempting part of banks’ excess reserves from being charged -40bps deposit rates. 

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