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

The 28 EU leaders care more about fiscal orthodoxy than effectively fighting youth unemployment

Is South Korea set to lose from its FTA with the EU?

Meet Alice, the battery-powered plane that could herald the age of electric air travel

We need to measure innovation better. Here’s how

Why I stopped taking the lift

The 2020 Sakharov Prize awarded to the democratic opposition in Belarus

Climate Change : An Already Health Emergency

The Government of China and UNIDO partner to develop technical guidelines for standards of small hydropower development

‘No-deal’ Brexit preparedness: European Commission takes stock of preparations and provides practical guidance to ensure coordinated EU approach

The three sins the EU committed in 2015

Syrian crisis: EU mobilises an overall pledge of €6.9 billion for 2020 and beyond

China is adding a London-sized electric bus fleet every five weeks

Afghans entitled to live ‘free from fear, intimidation’, says UN chief, condemning suicide attacks

COVID-19: A coordinated EU health strategy needed, say MEPs

Almost there: Equal healthcare for LGBTQI+

As coronavirus spreads to poorer countries, here’s how the world can help

Protecting workers from biological agents: how to classify SARS-CoV-2

The European Union continues to lead the global fight against climate change

Respect for fundamental rights and freedoms key for peaceful polls in DRC – UN mission chief

UN calls for shipping ‘propulsion revolution’ to avoid ‘environmental disaster’

Meeting of top scientists underway to slow coronavirus spread

Ambitions are affordable for Asia and the Pacific

Intervene, don’t overthink – the new mantra of systems design

Uganda’s Ebola preparedness ‘will go a long way’ says WHO chief

A ‘strong and united Europe’ has never been more needed, declares UN chief Guterres

The US banks drive the developing world to a catastrophe

Banks can fight financial crime. But we can’t do it alone

Coronavirus update: COVID-19 likely to cost economy $1 trillion during 2020, says UN trade agency

We must stop a devastating ‘battle to the end’ in southwest Syria, declares UN envoy

New EU rules to thwart money laundering and terrorist financing

Weak growth of G20 international merchandise trade in third quarter of 2018

TTIP fight round 6: last chance for the negotiators to finally open up as they touch the Brussels ring

Ebola: EU announces new funds to strengthen preparedness in Burundi

The jobs forecast is unsettled. It’s time for a reskilling revolution

From books to bikes: 4 unexpected gender gaps

Human Rights breaches in Saudi Arabia, Chechnya and Zimbabwe

At Ministerial session, UN regional office in Beirut to focus on technology for sustainable development

US and China in painstaking efforts to conclude trade talks

Parliament boosts consumer rights online and offline

These deepwater fish farms could help natural stocks recover

State aid: Commission adopts Temporary Framework to enable Member States to further support the economy in the COVID-19 outbreak

Sweden’s forests have doubled in size over the last 100 years

‘Starvation’ now a reality for displaced Syrians stranded in camp near Jordanian border

The digital revolution will transform the steel industry

Can the EU assume the mantle of global leadership?

Consumer product quality: MEPs take aim at dual standards

The Peoples are missing from EU’s monetary union

Myanmar willing to repatriate ‘verified returnees’ from Bangladesh

‘Deeply concerned.’ WHO officials stress the need for continued vigilance – WHO briefing

Chicken soup for the digital soul: how to bring community back online

All States have ‘primary responsibility’ to protect against hate attacks

UN blue helmets in South Sudan use Sustainable Development Goals to help build peace

Implementation of tax transparency initiative delivering concrete and impressive results

EU Trust Fund Bêkou for the Central African Republic extended until 2020

Streaming music isn’t as green as you might think. Here’s why

Clamp down on illegal trade in pets, urge Public Health Committee MEPs

EU Budget: A Reform Support Programme and an Investment Stabilisation Function to strengthen Europe’s Economic and Monetary Union

Farmers on the frontline in battle against drug-resistant microbes: UN health agency

Myanmar and UN agriculture agency agree framework to improve nutrition and food security

Human rights champions from across the world receive top UN prize

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