ECB: Growth measures even before the German elections

Benoît Cœuré, Member of the Executive Board of the European Central Bank (ECB), participating in the conference "Financial Stability and the Single Market – The Keys to Growth in Europe". (EC Audiovisual Services).

Benoît Cœuré, Member of the Executive Board of the European Central Bank (ECB), participating in the conference “Financial Stability and the Single Market – The Keys to Growth in Europe”. (EC Audiovisual Services).

Benoît Cœuré a French economist, Member of the Executive Board of the European Central Bank and former head of French public debt office, delivered a revealing speech on ECB’s programme for Eurozone state bond purchases in the secondary markets, known as Outright Monetary Transactions initiated in September 2012. Cœuré said that OMTs arrested and neutralised the catastrophic sequence and the disastrous eventualities of self-fulfilling predictions about euro area break-up which plagued the financial markets last summer. He insisted that this initiative was not only within ECB’s mandate but it constituted a fundamental obligation of Eurozone’s central bank. Cœuré was speaking at the Centre for Economic Policy Research, a German Institute for Economic Research and KfW Bankengruppe, last Monday 2 September.

In one word the OMTs are there to stay and, according to what the President of ECB Mario Draghi has left to be understood during this summer, the ECB will soon reinforce its long-term monetary easing with more extraordinary measures. Actually the central bank might introduce measures touching the limits of growth policies despite the German opposition. The coming elections in this country on 22 September do not constitute an impediment in this direction and probably the ECB is to announce its new policies prior to this date. The German voters should not go to polling stations without knowing.

But let’s return to Benoît Cœuré’s revealing speech, describing the devastating developments in Eurozone’s capital markets in the summer of 2012, and the dangerous culmination of this sequel until the ECB decided to intervene with its OMTs in August 2012. He said {A “bad equilibrium” of an adverse scenario was possible, triggered by self-fulfilling and reinforcing expectations. In this adverse scenario, the expectation of one or several countries exiting the euro would have driven public and private financing costs in these countries at such a high level that they would have had no other option than to actually exit}.

Fulfilling ECB’s obligations

Those countries were the third and the fourth largest Eurozone economies, Italy and Spain, to be accompanied to the exit by Greece, Portugal and Ireland. At that point the question which arose was whether ECB is within its mandate in doing whatever it takes to safeguard the Eurozone and the euro? The answer came with the famous speech of Mario Draghi, at the Global Investment Conference in London on 26 July 2012, when he said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”. This was the first reference to what was to follow that is the OMTs.

One year later, Benoît Cœuré comes now to analyse, justify and actually include in central banking textbooks the OMTs. He did this last Monday when he said “First, the necessity of OMTs. Here, I will recall the circumstances that made OMT necessary. Second the effectiveness of OMTs. I will explain why OMTs were effective from a monetary policy perspective and finally the robustness of OMTs. I will show that the design of OMTs is robust to the criticisms that have been raised in the public debate”. Actually he delivered on all those accounts.

Today the necessity and the effectiveness of OMTs are already proven in action beyond reasonable doubt. Eurozone’s financial markets have calmed down and Italy and Spain can borrow at sustainable interest rates, without the ECB having spent not even one euro. What remains unanswered is the criticism whether the OMTs were within ECB’s mandate. In this respect the strongest argument against is that the central bank by buying government bonds even in the secondary market neutralises to a varying degree the pressures on politicians, governments and Parliaments alike, to take the needed but unpopular corrective fiscal and economic policy measures. According to this line of thinking, the ECB is actually following fiscal policies ways outside its mandate by accommodating the imprudent governments.

Strong answers

To this criticism the French economist answers that “one should not ignore the most important feature of OMTs, namely: its explicit link to policy conditionality”. At this point it has to be reminded that the OMTs were designed together with the European Commission. The EC undertook the task to draft a corrective economic and fiscal programme to be applied together the OMTs (purchases of the given country’s public debt paper) and make sure that the member state in question is effectively implementing it.

In this way the country in question would be given the time to correct its economic problems while being able to borrow at interest rates reflecting only its basic economic stance and shortcomings, but insulating it from the catastrophic ‘predictions’ for a potential exit from the euro area. In short “OMTs are not just words: the ECB is fully prepared to use them. But even if euro area member states comply with the conditions, there is no automatism to activate OMTs”.

Liquidity needs

Last but not least Cœuré referred to ECB’s fundamental obligation to secure the liquidity of the euro system, without making exceptions or introducing conditions. He explained that “the decision on the geographical allocation of liquidity across countries is not at the discretion of the ECB: it is essentially market-driven and depends on the liquidity needs of the banks”. Given that he concluded that “the transfer of risk is inevitable because a decentralised allocation of liquidity is a pre-condition for achieving our mandate of price stability. If we were to impose a specific distribution of liquidity across countries we would have to renege on our mandate”.

This is a direct answer to Berlin. The Germans insist that the ECB function and the use of the euro money by 17 EU member states should not act as a diffusion mechanism of specific country risk emigrating to the entire Eurozone. This speaker says that this is not possible. He proves here above that the very basic obligation of ECB to guarantee the liquidity of the euro system is by itself a built-in mechanism automatically defusing to some extend specific country risks to the entire money zone. In short Germany and the other surplus countries cannot have it both ways; ripping the benefits of a seamless monetary and product market environment without undertaking any risks inherent in Eurozone.

Cœuré and Draghi know how to answer the German grievances. Last July the ECB governing council, including the two and a half German representatives, decided unanimously to guarantee that there will be abundant and almost zero cost liquidity in the eurosytem, “for as long as it is needed”.







the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

EU Parliament: The surplus countries must support growth

The world is too complacent about epidemics. Here’s how to change

3 vital steps to a new gender equality playbook

From low-earth orbit, ‘envoys’ of humanity join UN space forum

ECB to play down IMF’s alarms for deflation danger in the EU

Colombia: Santos thanks the EU for its support to the peace process

As Saudi women take the wheel, UN chief hopes end of driving ban creates more opportunities for kingdom’s women and girls

Aid teams respond to escalating southwest Syria conflict: 750,000 civilians are at risk

Here’s what keeps CEOs awake at night (and why it might be bad news for your next job)

Free trade agreement between EU and India?

EU unveils plan to accelerate Capital Markets Union ahead of London’s departure from the bloc

The developing countries keep the world going

Safe drinking water, sanitation, are ‘basic human rights’: new UN Water Development report

Parliament wants to suspend EU accession negotiations with Turkey

AIESEC @ European Business Summit 2014: European Youth, Change Now Patiently

Rise in number of children killed, maimed and recruited in conflict: UN report

How to tap the talents of refugees – one student at a time

Four ways innovation can help to beat heart disease

Brazil’s hopeless future of science

Feeding families remains complex task in war-torn Syria – UN relief agency

Google strongly rejects EU antitrust charges and now gets ready for the worst to come

‘Global trust’ declining, ‘our world needs stepped-up global leadership’

G20 LIVE: “United States and Turkey stand in solidarity with France and its people in handing the perpetrators of this crime and bringing them to justice”, US President Barack Obama underlines from G20 in Antalya Turkey

MEPs call for decisive action to fight inequalities in the EU

The global issue of migration in 2017

What can the private sector do to alleviate the refugee crisis?

Brexit update: Will Theresa May’s last-minute desperate efforts procrastinate Brexit?

Obese people more likely to smoke, says new gene research: WHO

This Dutch company has devised an innovative way to deal with food waste

UN chief welcomes prisoner exchange between the Russia and Ukraine

UN emergency relief fund has ‘never been more critical’: Guterres

The US will impose tariffs on Mexico, says President Trump

How to beat gender stereotypes: learn, speak up and react

Hunger in Yemen: WFP considers aid suspension in face of repeated interference by some Houthi leaders

Depression is the no. 1 cause of ill health and disability worldwide

Multilateralism must weather ‘challenges of today and tomorrow’ Guterres tells Paris Peace Forum

Facebook and Google to treat Europe as the 51st State of the USA

Why economic growth depends on closing the interview gap

“For my children Italy will be an innovation lab and not a museum”; the Sting reports live from World Economic Forum 2015 in Davos

Four years on and half a billion dollars later – Tax Inspectors Without Borders

The world’s coastal cities are going under. Here’s how some are fighting back

Gender Equality Index 2019: Still far from the finish line

Mergers: Commission approves Varta AG’s acquisition of Energizer’s divestment business, subject to conditions

The Fourth Industrial Revolution is redefining the economy as we know it

Assembly of European Regions @ European Business Summit 2014: Made in Europe – Made of Regions

No barriers to free flow of non-personal data in the EU

Trump beats Clinton but Americans will learn the hard way that the US can’t change with an election

More beehives and beekeepers thanks to EU support

Alarming number of Ebola deaths in DRC a ‘rallying cry’ to scale up treatment

This is where people work the longest – and shortest – hours

UN chief sends condolences to families of Malawi flood victims

How to get ageing populations to invest in their health

MEPs list conditions for new EU-Azerbaijan deal

Top UN court rules it has jurisdiction to hear Iranian claim against US over frozen assets

Netherlands: Budget MEPs back €1.2m in job-search aid for 450 redundant workers

Crop yields are up in Syria, but higher prices still cause major strain: new UN report

Factories are no longer the sure route to prosperity. Here’s why

Spending another 3 billion euros on Turkey feels better than admitting EU’s failure

Canada leading the way on women’s inclusion and empowerment, says OECD

Irish Presidency: Not a euro more for EU budgets

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s