Isabel Schnabel from the ECB and the former economist Lars Feld are arguing with the Greens over monetary policy, the risk of a real estate bubble – and bond purchases for climate protection.

Is the ECB to blame for the low interest rates?

Dthe crowd surprised the Greens themselves. After all, 2000 participants wanted to follow online on Wednesday evening how ECB board member Isabel Schnabel and the recently resigned chairman of the economy, Lars Feld, are arguing about monetary policy under the title “ECB: Low interest rates without end?”. Moderator Sven Giegold from the Greens in the European Parliament emphasized that monetary policy is currently a topic that attracts a lot of attention, even for the Greens’ clientele – not only when it comes to a stronger commitment by the central bank for climate protection.

How much to blame the ECB for the fact that interest rates are so low was the first question that preoccupied the duo. “Citizens believe that the ECB’s share of the low interest rates is huge,” said moderator Giegold. “You ask yourself: Can you trust a monetary system where the money in the account increases less than inflation eats up?” Schnabel did not want to commit himself to a percentage for the share of the central bank in the low interest rates.

Instead, it showed a chart that, in its view, describes the central bank’s leeway: a gray range around a blue curve. Real economic factors such as demographic development and globalization have pushed down the path of the equilibrium interest rate, which, in simplified terms, describes the interest rate level without inflation. Monetary policy tries to control the interest rate. However, it must be based on this equilibrium interest rate – for example, it must be lower in order to be further expansionary. The central bank thus has leeway and influence on the interest rate; but both of these come up against clear limits.

Isabel Schnabel is a member of the Executive Board of the ECB.  When she took office a good year ago, she set out to explain monetary policy better.
Isabel Schnabel is a member of the Executive Board of the ECB. When she took office a good year ago, she set out to explain monetary policy better. : Image: Reuters

Feld followed her argument that it was not the ECB that had pushed interest rates overall to such a historically low level. He also does not see himself as a critic of the monetary union, said the economist: “I have a great interest in the continued existence of the monetary union.” His criticism of the ECB is not fundamental, but of the extent. An example: The Council of Economic Experts wrote in 2017 that the central bank could have been less relaxed in its monetary policy in 2018: “The ECB could have stopped buying bonds sooner.”

Both economists currently see a high probability that inflation will rise. For Germany, the Bundesbank is expecting monthly inflation rates of more than 3 percent this year, which is quite realistic. But these are consequences of the economic recovery, the introduction of a CO2 price, the renewed increase in VAT and the rise in the price of oil. “None of this will bring galloping inflation this year – and rates over 2 percent are not a problem either,” said Feld.

What was disputed is the further future. There are certainly reasons why inflation could increase in the longer term, for example if the influence of demographic development is reversed, said Feld. If then the capital market interest rose, the national debt for the heavily indebted countries would be more oppressive. “Then it has to be shown: Does the ECB have the strength to pull this off and to pursue its inflation target if interest rates for the states rise”, said Feld: “Then there will be an oath.”

Lars Feld is Professor of Economic Policy at the University of Freiburg.  Until recently he was a member of the Economic Advisory Council and its chairman.
Lars Feld is Professor of Economic Policy at the University of Freiburg. Until recently he was a member of the Economic Advisory Council and its chairman. : Image: dpa

The audience was particularly interested in one question: How does the ECB deal with possible property price bubbles caused by low interest rates? And: is it also responsible for the high rents? Schnabel admitted that there are effects of monetary policy on asset prices, and that the central bank must also examine the side effects and proportionality of every measure. In the case of real estate prices in the German metropolitan areas, for example, there are some clear indications of an overvaluation.

Economists only know whether that is a bubble when it bursts, said Feld. It is different with rents, where monetary policy does not play such a role. It is not so clear whether real estate prices have an impact on rents at all – or whether it is not the other way around.

Schnabel and Feld put significantly different accents on the question of “green” monetary policy. The former economy emphasized that he would be “cautious with the climate target as a further goal of the ECB”. Schnabel, on the other hand, recently argued, similar to Greenpeace, that the ECB might prefer climate sinners in its bond purchases. The sectoral composition of corporate bonds in the ECB’s holdings differs roughly from their share in value added. The ECB is buying corporate bonds in proportion to their availability on the bond market, that is the current definition of “market neutrality”.

The result: “We buy a particularly large number of sectors with a high emission intensity.” The accusation of distortion by the current rules is therefore “completely correct”: “If the market is characterized by market failure, the market may not be the right benchmark,” said Schnabel . “Then we have to think about a new benchmark.”

Nonetheless, both discussants defended the German Bundesbank President Jens Weidmann against attacks from the Green camp: This was by no means the brake on European monetary policy “greening”. “A lot has happened in the last few months,” said Schnabel. “Many have moved – including Mr. Weidmann.”