Tag / ECB

by Erik Jones

Central Bankers Seeking Normal

There is an ongoing debate about when (not whether) the Federal Reserve in the United States and the Bank of England will raise interest rates. Opponents of such a move acknowledge that interest rates have to go up some time but argue that the ongoing weakness in Europe, the slowdown in emerging market economies, and the turmoil in China are all good reasons to wait as long as possible. Proponents of an early rise worry about the distortions caused by prolonged ultra-low interest rates. They also want to bring interest rates up again so that they will have something to cut should they run into trouble in the future.

This debate may seem like the usual macroeconomic conversation you would expect to hear among central bankers and yet it is not. There is an underlying political controversy around central banking that creates an incentive for central bankers to move more quickly in raising interest rates than economic conditions might warrant. This controversy takes place any time central bankers approach the frontier between ‘conventional’ and ‘unconventional’ monetary policy; it gets stronger and more intense once they crossover and start using unconventional monetary policy instruments; and it lasts until central bankers find a way to return to normal.

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by Erik Jones

The ECB’s Diminishing Room for Manoeuvre

European Central Bank (ECB) President Mario Draghi did not disappoint. In his first post-summer press conference, he responded to the recent volatility on Chinese equities markets – and across emerging markets more generally – by promising to relax monetary policy as much as necessary to shore up Europe’s fragile recovery. He articulated the promise in the form of a three-fold commitment: to expand the share of individual bond issues that the ECB could purchase without giving the central bank unwarranted market power; to maintain the pace of monthly asset purchases; and to loosen monetary policy even further ‘by using all instruments available within its mandate’ particularly as this refers to ‘the horizon, the size, and the parameters’ of ‘the asset purchase programme’. Market participants were quick to respond. The euro weakened against the dollar; equity prices rose on European stock markets; and the yields on European sovereign debt instruments declined.

It is easy to interpret living up to expectations as a sign of the ECB’s continuing influence over the markets. ‘Never bet against Draghi,’ is a popular banter among analysts. The transcript of the press conference tells a different story. Time and again, Draghi explains how his quantitative easing program has underperformed due to the influence of exceptional factors. Periodic declines in commodity prices, prolonged weakness in emerging market economies, increasing volatility in asset prices, and adverse movements in exchange rates between major currencies all contribute to the explanation. Of course the ECB could try again and harder, but why should the next time be any different? This question is not simply a rhetorical flourish. The canned opening statement only makes sense if the first commitment to quantitative easing was a failure.

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by Erik Jones

Sustainable Integration as a Reponse to Mario Draghi’s ‘Imperfect’, ‘Fragile’ and ‘Vulnerable’ Union

When Mario Draghi was asked on Thursday (16 July) whether the recent crisis surrounding Greece had made the monetary union more vulnerable, he gave an astonishingly frank response. Draghi denied that the discussion about Greece made the union more vulnerable; nevertheless, he admitted that:

this union is imperfect. And being imperfect, is fragile, is vulnerable, and doesn’t deliver all the benefits that it could if it were to be completed. So the future now should see decisive steps on further integration.

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by Erik Jones

The Choice for Europe

The Greek referendum has left the Governing Council of the European Central Bank (ECB) with a political choice that it should not have to make. The ECB will need cover from Europe’s political leaders no matter how this plays out. As with most important choices, this one will make some people very unhappy. We should expect to see opposition emerge both in the media and in the courts. Worse, the choice that the ECB has to make will unfold in stages. It involves a series of decisions and not a simple one-off commitment. That means Europe’s political leaders will have to insulate its central bankers from opposition for the foreseeable future and probably until long after the immediate crisis has passed. Finally, this is a choice that will define Europe’s future; not only will it tell us precisely what it means to be a member of the euro as a single currency, but it will also set a precedent for how much solidarity national governments should expect to receive and to offer.

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