The European Central Bank (ECB) made no changes to its policy stance when the Governing Council met in Vienna on 2 June. Price inflation in the euro area remains well below the ECB’s definition of price stability and the prospects for inflation to move upward remain unchanged. Nevertheless, ECB President Mario Draghi argued in response to questions during his press conference, ‘we have to see the full impact of the measures that we’ve decided in March.’ Some of those, like the targeted long-term refinancing operations that offer to subsidize bank lending and the inclusion of corporate bonds in the ECB’s large-scale asset purchases will only start over the coming weeks. It takes time for such measures to work their way through to the consumption and investment that drives the real economy. And for those who complain that the ECB seems slow in meeting its policy target, Draghi made it clear that: ‘the medium term for a return to inflation to our objective of an inflation rate of close to but below 2 percent is pretty long.’ In other words, the ‘medium term’ from the ECB’s perspective is essentially as long as it takes.
Tag / ECB
Bonfire of the Certainties
Free trade is welfare enhancing. Interdependence requires cooperation. Central banks should be politically independent. And the United States is the indispensable world leader. These are the certainties we used to offer graduate students in international relations. Now they are all aflame.
Banking Union or Bait-and-Switch?
When the Council of Economics and Finance Ministers (ECOFIN) meets informally on Friday, 22 April, one issue on the table will be the reduction of bank exposure to the sovereign debt of their home governments. This issue was laid out in a note from the Dutch Presidency that was leaked on Wednesday. The response of the Italian government in particular was immediate and strongly negative. Italian banks are heavily exposed to Italian sovereign debt and any attempt to reduce that exposure would impose unacceptable costs on an already fragile Italian financial system. To some degree this is the case for other peripheral countries as well. The Dutch Presidency note argues that Europe’s banking union needs to be strengthened with some kind of European Deposit Insurance Scheme (EDIS) and ‘a common backstop for the Single Resolution Fund (SRF)’. Before the Dutch Presidency can flesh out its position on these key support mechanisms, however, it needs to tackle the ‘bank-sovereign nexus’ so that ‘risk sharing and risk reduction go together’. Intellectually, this is a coherent argument.
The ECB’s New Tactic — Pay to Lend
The European Central Bank (ECB) announced a raft of policy measures on Thursday, March 10, intended to give a further boost to euro area economic performance. Most of these measures were unconventional and yet still precedented. The ECB lowered its main policy rates, accelerated the pace of its asset purchases, and widened the pool of assets eligible to be included in its purchasing program. It also renewed its program for targeted loans to banks that extend credit to the non-financial sector. The only new element was the rate of interest that the banks would pay to access credit that they could lend for investment. The question is whether that new wrinkle will make much of a difference. As is often the case, the answer depends less on the mechanics of monetary policy than on the magic of market ‘confidence’.
We Don’t Give Up
Mario Draghi reassured the markets at the 21 January press conference of the European Central Bank (ECB) by making it clear that the Governing Council is unanimous in its desire to reassess economic conditions at the upcoming March meetings and to reconsider its policy stance if necessary. He stressed that there is no limit to the action that the ECB can undertake to achieve its mandate. And he reiterated that whatever the actual policy decision in March, the ECB is already working to resolve any technical issues that might prevent it from using the full range of instruments at its disposal. The response in the markets was immediate. Bonds and equities rallied while the euro moved lower against the dollar – all good things from the ECB’s perspective. ECB watchers were cautiously optimistic. A few voices noted that the ECB had promised in October of last year only to under-deliver in December; this time actions should speak louder than words. So should results. Draghi has reiterated his July 2012 promise to do ‘whatever it takes’. What he did not say is that ‘it will be enough’. Instead, he insisted: ‘We don’t give up.’
More than Just debt
Europe’s Orphan: The Future of the Euro and the Politics of Debt. By Martin Sandbu. Princeton: Princeton University Press, 2015. 313 pp. $29.95. ISBN: 978-0-691-16830-2 (cloth).
The euro did not cause Europe’s economic crisis; policymakers did. By focusing too much attention on debt, by demanding that existing obligations be met in full (and creditors made whole), and by doing so against a backdrop of coordinated macroeconomic tightening, Europe’s policymakers ensured that the downturn in European macroeconomic performance would be deep, long, and destructive. These same policymakers only narrowly avoided disaster when they began to loosen monetary policy and to accept the need for some debt restructuring. Nevertheless, these efforts did not come soon enough, they were no comprehensive enough, and they were not applied consistently enough to prevent Europe from coming to the edge of disaster as elite macroeconomic ideology finally collided with the requirements for democratic legitimacy in Greece (and Germany) during the summer of 2015. This is the diagnosis Martin Sandbu offers to explain what went wrong.
Lessons from Greece? Individuals Matter
European integration is a process that derives from broad social movements. We look for its origins in the terrifying experience of the twenty years’ crisis, bookended by two cataclysmic world wars. ‘Europe’ is not necessarily a rejection of the nation state, but it is an attempt to rescue the nation state from its inherent limitations and vices. It is a forum within which France and Germany can reconcile their differences; Britain can adapt to its relative decline; Southern Europe can find a bulwark for democracy; and Eastern Europe can emerge from communism.
But Europe is made by people and sometimes individuals can play a decisive role. The events of the past summer are a good example. There are many prominent scholars who have tried to cast the Greek crisis as some kind of clash of economic cultures or institutional path dependence gone wrong. Those arguments have merit. But they do not capture the essence of what happened; they fail to explain how Europe came so close to disaster; and they make it harder to anticipate what could still go wrong.
Central Banking Divergence Means Market Volatility
There are three divergences in the art of central banking. The most obvious is between the monetary tightening expected in the United States and the loosening expected in Europe. A second divergence is between the prudential oversight of the banking system and the conduct of macro-economic demand stabilization – particularly quantitative easing. A third divergence is between the communication of forward looking policy intentions and the practice of monetary policy decision-making. Each of these divergences acts as a constraint on the conduct of monetary policy; the juxtaposition of all three increases the risk of significant market volatility.
Continuing European Economic Vulnerability
The European Commission’s autumn economic forecasts paint a bleak picture. The headline is cautiously optimistic. European growth is moderating but should improve in the forecast period thanks to an accommodating monetary policy, a neutral fiscal stance, and a gradual relaxation of ‘headwinds’ coming from other parts of the globe. The analysis itself is more troubling. European growth relies excessively on external markets; price inflation will recover as commodity prices stabilize at low levels; and monetary policy accommodation in Europe contrasts with a gradual tightening in the United States with uncertain implications for market volatility and global capital flows. The bottom line is that things may get better and yet then again they may not. Although the authors of the forecast would argue otherwise, this is not a message that offers much hope.
European Capital Markets: Efficient . . . but Resilient?
The goal of the capital markets union is to make European financial market integration more efficient. Firms will be able to gain access to international credit (and other forms of capital) directly from the market rather than having to rely on banks for intermediation; savers will be able to gain access to cross-border investment opportunities without facing high transaction costs.
