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”.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

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

Harnessing the power of nature in the fight against climate change

EU and China resolve amicably solar panel trade dispute

United States: UN human rights office welcomes California moratorium on death penalty

Is Europe misjudging its abilities to endure more austerity and unemployment?

ECB’s first flight in Eurozone’s banking universe will be just a reconnaissance

Blockchain will make sure green pledges aren’t just greenwash: a new initiative by young leaders at the World Economic Forum

These cities score an ‘A’ for environmental action – but hundreds more are falling behind

Planet’s Health is Our Health and the Reverse is True

The road ahead to building a more sustainable world

Bring killers of journalists to justice: UN agency seeks media partners for new campaign

The world is facing a $15 trillion infrastructure gap by 2040. Here’s how to bridge it

UN rights office calls for action to end ‘repression and retaliation’ in crisis-torn Nicaragua

Google once more under EU crossfire from a possible record fine and new Right to be forgotten case

IMF launches a new offensive against Germany

Business uncertainty rises as US grants only temporary exception to EU for steel and aluminium tariffs

At global health forum, UN officials call for strong, people-focused health systems

EU: Turkey to shelter Syrian refugees and turn other immigrants back in return of €3 billion

The European Agenda on Migration: EU needs to sustain progress made over the past 4 years

Except Poland, can climate change also wait until 2021 for the EU Market Stability Reserve to be launched?

Migrants and refugees face higher risk of developing ill-health, says UN report on displaced people in Europe

So, what is your favourite Sustainable Development Goal?

Britain, EU take edgy steps to unlock Brexit talks as the war of words rages

How to make primary healthcare a favourable career choice for medical students: strategies and reflections

A Europe that protects: EU customs seized over 31 million fake goods at EU borders in 2017

How a more integrated approach could help to end energy poverty

Charlie’s tragedy energized deeper feelings amongst Europeans; back to basics?

State of the Union 2018: The Hour of European Sovereignty

YouTube stars get creative at UN, to promote tolerance

Venezuela must guarantee judicial impartiality – UN human rights expert

Asian and Pacific economies: decreases in tax revenue highlight need to broaden tax bases

Knowledge management and entrepreneurship: short term vs. long term perspective

How a possible EU budget deficit affects the migration crisis

GSMA Mobile 360 Series –Digital Societies, in association with The European Sting

What could a no-deal Brexit mean for developing countries?

It is me

3 megatrends for the factories of the future

Statement by Cecilia Malmström, Member of the EC in charge of Trade, on the successful conclusion of the final discussions on the EU-Japan Economic Partnership Agreement (EPA) – Brussels, 08 Dec 2017. (Copyright: European Union; Source: EC - Audiovisual Service; Photo: Georges Boulougouris)

The EU and Japan seal free trade pact that will cover 30% of global GDP

5 surprising ways digital technology is changing childhood

This Japanese TV show about work-life balance is a big hit – here’s why

Safe spaces offer security and dignity for youth, and help make the world ‘better for all’: Guterres

China is sending science students to live with rural farmers – and crop yields are skyrocketing

More funding needed to tackle child labour in agriculture says UN, marking World Day

How can we measure real progress on the Sustainable Development Goals?

GSMA Reveals Shortlist For 2019 Asia Mobile Awards

Celebrating Gaston Ramon – the vet who discovered vaccinology’s secret weapon

Three ways to improve your corporate culture in the #MeToo era

Could implants treat people with brain disease? A young scientist explains

‘No other possibility but to leave’: UN News special report from the Nigeria-Cameroon border as 35,000 newly-displaced seek safety

E-Government can be a remedy for the crisis

These are the world’s 20 most dynamic cities

GSMA Mobile 360 Series – Europe – 14 June 2016

What does the future of energy look like, how do we get there, and who will benefit?

Central African Republic: UN chief hails signing of new peace agreement

Why we need a new social contract for data in healthcare

October’s EU strong digital mix: From Safe Harbour to Net Neutrality, Roaming and Snowden

Health & Sustainable Development Goals: it’s about doing what we can

Young people meet in Malta to shape the future of Europe

Why Obama asks approval from Congress to bomb Syria?

UNICEF delivers medical supplies to Gaza in wake of deadly protests

Don’t dismiss start-ups founded by millennials. This is how they succeed

More Stings?

Speak your Mind Here

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

WordPress.com Logo

You are commenting using your WordPress.com 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