European Economic Integration – 110451-0992 – 2014
VIII European Monetary Union(EMU)
Euro area Member States
Non-euro area Member States
Prof. Dr. Günter S. Heiduk
Member States with an opt-out
1
Debating Europe
Some thoughts on the EURO
“EMU will have a very pervasive impact on the working
of the economy. Many different mechnisms will come
into play and interact .“
One Market, One Money (1990)
“I believe the Euroland is going to run into big
difficulties. That's because the different countries have
different languages, limited mobility among them, and
they're affected differently by external events.“
Milton Friedman (2003)
“Policy-makers rushed to negotiate a detailed
agreement, having no time for detailed economic
analysis.“
Charles Wyplosz (2006)
3
Today‘s Anti-Euro and Pro-Euro Debate
“The euro area will hang together, in other words, because the decision to enter is
essentially irreversible. Getting out is impossible without precipitating the most serious
imaginable financial crisis – something that no government is prepared to risk.”
Barry Eichengreen, 2007, http://www.voxeu.org/article/was-euro-mistake
IFO Policy Issue: Euro Crisis
“The euro rescue plan suspended fundamental principles of the Maastricht Treaty,
especially the no-bail-out clause – a ban on mutual credit assistance. These changes
had serious economic consequences. The interest rates on government bonds of the
various countries that were drifting apart as a result of the new risk assessments were
to be artificially kept together. This led to a weakening of the control function of the
capital market, which induces cautious behaviour on the part of borrowers and creditors.
For Germany the package bears considerable budgetary risks. Moreover, it retards
economic growth since the guarantees for the euro partners divert additional capital to
the indebted countries which is thus no longer available for investments in Germany.
As a result of the crisis the question of structural reform for the currency union has
come to the forefront.”
Source: http://www.cesifo-group.de/ifoHome/policy/Spezialthemen/Policy-Issues-Archive/Euro-Krise.html
“Although the European Monetary Union has survived for 11 years, the current strains
within the euro zone show why it may not last for another decade without at least
some of its members leaving.”
Martin Feldstein, 2012, http://www.economist.com/debate/days/view/5
“I believe that there is still a fighting chance that the monetary union will emerge
strengthened, not weakened. But policymakers will have to radically raise their game.”
Charles Wyplosz, 2012, http://www.economist.com/debate/days/view/522
Who is the Patient: Euro versus US$
Appreciation of the EURO
Depreciation of the US$
5
Source: Pacific Exchange Service
Who are the Patients: PIGS versus G+F
Quarterly GDP, Change over Previous Quarter, in %, Selected Countries, Q3-2007 – Q2-2012
6
Source: Own calculations on OECD National Accounts Statistics.
What is wrong in the Eurozone?
ECONOMICS ?
POLITICS ?
Mundell‘s Optimum
Currency Approach
Pareto‘s Policy
Priority Approach
Countries/regions
that are highly
integrated by
cross-border flows
of production
factors can fix the
exchange rate or
introduce a
common currency
Political integration
paves the way
toward economic
integration,
means: common
fiscal policy first,
monetary union
second
SOCIETY ?
Schmölder‘s
Credibility Approach
Money is what‘s
being generally
accepted
“Geld ist, was gilt“
7
ECONOMICS ?
POLITICS ?
SOCIETY ?
Reality
Reality
Reality
Maastricht Treaty:
Convergence
Criteria
EU budget has no
fiscal impact
Hidden scepticism,
but globally still
high acceptance of
the Euro
Increasing function
as currency
reserve
Weakness:
Control + sanctions
mechanisms didn‘t
function after
countries joined the
Eurozone
National
competence in all
policies which are
relevant for budget
imbalances
between Member
States
8
The European way to solve the impossible “trinity“
Source: Mongelli, F P (2008). European Economic and Monetray Integration and the Optimum Currency Area Theory. Economic
Papers 302. European Commission.
9
Europe: Home of a Complex, Partly Overlapping System of Institutions
Eurozone: Part of a complex
system of institutional
arrangements
http://en.wikipedia.org/wiki/Eurozone
10
Arguments for a single European currency
Arguments against a single European
currency
Cost of Introduction
Consumers and businesses will have to convert their bills and coins into
new ones, and convert all prices and wages into the new currency. This
Transaction Costs
Having to deal with only one currency will reduce the cost of converting will involve some costs as banks and businesses need to update
one currency into another. This will benefit businesses as well as tourists. computer software for accounting purposes, update price lists, and so on.
Non-Synchronicity of Business Cycles
No Exchange Rate Uncertainty
Eliminating exchange rates between European countries eliminates the Europe may not constitute an "optimum currency area" because the
business cycles across the various countries do not move in
risks of unforeseen exchange rate revaluations or devaluations.
synchronicity.
Transparency & Competition
The direct comparability of prices and wages will increase competition Fiscal Policy Spillovers
across Europe, leading to lower prices for consumers and improved Since there will only be a Europe-wide interest rate, individual countries
that increase their debt will raise interest rates in all other countries. EU
investment opportunities for businesses.
countries may have to increase their intra-EU transfer payments to help
Strength
The new Euro will be the among the strongest currencies in the world, regions in need.
along with the US Dollar and the Japanese Yen. It will soon become the No Competitive Devaluations
In a recession, a country can no longer stimulate its economy by
2nd-most important reserve currency after the US Dollar.
devaluing its currency and increasing exports.
Capital Market
The large Euro zone will integrate the national financial markets, leading Central Bank Independence
Previously, the anchor of the European Monetary System has been the
to higher efficiency in the allocation of capital in Europe.
independence of the German Bundesbank and its strong focus on price
No Competitive Devaluations
One country can no longer devalue its currency against another member stability. Even though the new European Central Bank (ECB) will be
nominally independent, it will have to prove its independence. This will at
country in a bid to increase the competitiveness of its exporters.
the very least incur temporary costs as it will have to be extra-tough on
Fiscal Discipline
With a single currency, other governments have an interest in bringing inflation.
Excessive Fiscal Discipline
countries with a lack of fiscal discipline into line.
When other governments exert pressure on a government to reduce
European Identity
borrowing, or even pay fines if the budget deficit exceeds a reference
A European currency will strengthen European identity.
value, this may have the perverse effect of increasing an existing
economic imbalance or deepening a recession.
11
How the Eurozone emerged
12
The Three Stages of Economic and Monetray Union
13
Source: Ibid.
Index of Institutional Integration of EU-6
Source: Ibid
14
The Institutional System
15
Monetary System in the European Union
The European System of Central Banks (ESCB)
• the European Central Bank (ECB) and
• the national central banks (NCBs) of all 27 EU Member States.
The Eurosystem = The central banking system of the euro
• the ECB and
• the national central banks (NCBs) of the 17 EU Member States
whose common currency is the euro.
The Eurosystem is thus a sub-set of the ESCB. Since the ECB's
policy decisions, such as on monetary policy, naturally apply only to
the euro area countries, it is in reality the Eurosystem, which, as a
team, carries out the central bank functions for the euro area. In doing
so, the ECB and the NCBs jointly contribute to attaining the common
goals of the Eurosystem.
ECB.Eurosystem
Basic Tasks of the Eurosystem
“Monetary policy
The Eurosystem is responsible for defining and implementing the monetary policy of the euro area. This is
a public policy function that is implemented mainly by financial market operations. Important for this task is
the full control of the Eurosystem over the monetary base. As part of that, the ECB and the national central
banks (NCBs) are the only institutions that are entitled to actually issue legal tender banknotes in the euro
area. Given the dependence of the banking system on base money, the Eurosystem is thus in a position to
exert a dominant influence on money market conditions and money market interest rates.
Foreign exchange operations
Foreign exchange operations influence exchange rates and domestic liquidity conditions; both are
important variables for monetary policy. Assigning this task to the Eurosystem is therefore logical, also
because central banks have the necessary operational facilities. Secondly, if the central bank carries out
this task, it ensures that the foreign exchange operations remain consistent with the aims of the central
bank's monetary policy.
Promote smooth operation of payment systems
Payment systems are a means to transfer money between credit and other monetary institutions. This
function places them at the heart of an economy's financial infrastructure. Assigning the task of promoting
their smooth operation to the Eurosystem acknowledges the importance of having sound and efficient
payment systems - not only for the conduct of monetary policy but also for the stability of the financial
system and as such for the economy as a whole.
Hold and manage foreign reserves
One of the most important reasons for managing the foreign reserves portfolio is to ensure that the ECB
has sufficient liquidity to conduct its foreign exchange operations. The ECB's foreign reserves are currently
managed in a decentralised manner by the NCBs that opt to take part in operational ECB foreign reserve
management activities. These NCBs act on behalf of the ECB in accordance with instructions received
from the ECB. Although the NCBs manage their own foreign reserves independently, their operations on
the foreign exchange market are, above a certain limit, subject to the approval of the ECB, in order to
ensure consistency with the exchange rate and monetary policy of the Eurosystem.”
ECB. Eurosystem
Decision-Making Bodies of the European Central Bank
“The ECB’s mission is to keep inflation low and stable. To achieve this goal, it closely
follows economic developments in the euro area and seeks to influence the state of
the economy through its decision-making.
The ECB is the centre of decision-making in the Eurosystem. Thus, the Governing
Council, the Executive Board and the General Council of the ECB each take all the
decisions necessary to enable the Eurosystem and the ESCB to carry out their
respective tasks. This includes the formulation of policies, such as the monetary
policy for the euro area, but also how they should be implemented.”
ECB.Eurosystem
Decision-Making Bodies of the European Central Bank
“Main decision-making body of the Eurosystem. It comprises
• all the members of the Executive Board of the ECB, and
• the governors/presidents of all the national central banks (NCBs) of the
euro area, i.e., those EU Member States that have adopted the euro.
Main responsibility
• formulating the monetary policy of the euro area by taking the necessary
decisions and adopting the Guidelines needed for its implementation.”
ECB.Eurosystem
Decision-Making Bodies of the European Central Bank
“The Executive Board of the ECB is the operational decision-making body of the
ECB and of the Eurosystem. It assumes the responsibility for all the decisions which
need to be taken on a day-to-day basis. The ECB must be able to react and adapt
to quickly changing conditions in the money and capital markets, to address specific
cases and to deal with matters of urgency. This function can only be performed by a
body whose members are permanently and exclusively involved in the implementation
of the ECB's policies. The Executive Board usually meets once a week.
Members
•the President of the ECB,
•the Vice-President of the ECB, and
•four other members.”
ECB. Eurosystem
Division of Labor in the Eurosystem
“Except for the statutory tasks that have been exclusively assigned to the ECB,
the ESCB Statute does not indicate to what extent ECB policies are to be
implemented through activities of the ECB or the NCBs. For the bulk of the
Eurosystem's activities, the actual intra-System division of labour has been
guided by the principle of decentralisation, with the ECB having recourse to the
NCBs, to the extent deemed possible and appropriate, to carry out operations
which form part of the tasks of the Eurosystem (cf. Article 12.1 of the ESCB
Statute).
Thus, the ECB and the NCBs jointly contribute to attaining the Eurosystem's
common goals. However, according to Article 9.2 of the Statute, the ECB has
to ensure that all tasks are carried out properly and consistently. To ensure
this across the euro area, the ECB has the power to issue guidelines and
instructions to the NCBs.”
ECB.Eurosystem
History of European Monetary Integration
The 1970s:
From Barre Plan to Werner Report
In 1969, the European Commission submitted a plan (the "Barre Plan") to follow up on the idea of a single currency
because the Bretton-Woods-System was showing signs of increasing strain.
Werner Report: published in 1970, proposing to create EMU (European Monetary Union) in several stages by 1980.
However, this process lost momentum in a context of considerable international currency unrest after the collapse of the
Bretton-Woods- System in the early 1970s and under the pressure of divergent policy responses to the economic shocks
of that period, in particular the first oil crisis.
To counter this instability and the resulting exchange rate volatility among the currencies, the nine members of the then
EEC relaunched the process of monetary cooperation in March 1979 with the creation of the European Monetary System
(EMS). Its main feature was the exchange rate mechanism (ERM), which introduced fixed but adjustable exchange rates among
the currencies of the EEC countries. Thus it required adjustments in monetary and economic policies as tools for exchange rate
stability. Within the EMS framework, the participants succeeded in creating a zone of increasing monetary stability and gradually
relaxing capital controls.
The 1980s:
The Exchange Rate Mechanism
The Exchange Rate Mechanism (ERM), established in 1979 which forms the core of the EMS, provides a means for stabilizing
exchange rates between member states of the ERM. All then member states of the EU except the UK joined the ERM.
Later, Spain followed in 1989 and Portugal in 1992; the UK in 1990, but was forced to withdraw from the ERM, along with Italy, in
autumn 1992. The fixed exchange rate system was build around the artificial European Currency Unit (ECU). The ECU
served as a payment and accounting unit for payment transactions between central banks.
The 1990s:
Steps to EMU
Stage One: The abolition of all internal barriers to the free movement of goods, persons, services and capital within EU MS.
Stage Two started with the establishment of the European Monetary Institute (EMI), the predecessor of the European Central
Bank (ECB), on 1 January 1994.
Stage Three: On 1 January 1999, the final stage of EMU, started with the irrevocable fixing of the conversion rates of the
currencies of the 11 Member States initially participating, and with the introduction of the euro as the single currency.
1st January 2002: Distribution of Euro banknotes and coins
25
Conversion rates
Conversion rate to €1
Euro-area Member State
Old national currency
Belgium
Belgian franc (BEF)
40.3399
Germany
German mark (DEM)
1.95583
Ireland
Irish pound (punt) (IEP)
0.787564
Greece
Greek drachma (GRD)
340.750
Spain
Spanish peseta (ESP)
166.386
France
Italy
Cyprus
French franc (FRF)
Italian lira (ITL)
Cyprus pound
Luxembourg
Luxembourg franc (LUF)
Malta
The Netherlands
Maltese lira (MTL)
Dutch guilder (NLG)
Austria
Austrian schilling (ATS)
13.7603
Portugal
Portugese escudo (PTE)
200.482
Slovenia
Slovenian tolar (SIT)
239.640
Slovakia
Slovak koruna (SKK)
30.1260
Finland
Finnish markka (FIM)
5.94573
6.55957
1936.27
0.585274
40.3399
0.429300
2.20371
26
27
Entry Terms
28
Joining the EURO AREA: Conditions for Entry (1)
”The process of building Europe is one of progressive integration. The single market for goods,
services, capital and labour, launched in 1986, was a major step in this direction.
Economic and Monetary Union and the euro take economic integration even further, and to join
the euro area Member States must fulfil certain economic and legal conditions.
Adopting the single currency is a crucial step in a Member State's economy. Its exchange rate
is irrevocably fixed and monetary policy is transferred to the hands of the European Central
Bank, which conducts it independently for the entire euro area. The economic entry conditions
are designed to ensure that a Member State's economy is sufficiently prepared for adoption of
the single currency and can integrate smoothly into the monetary regime of the euro area
without risk of disruption for the Member State or the euro area as a whole. In short, the
economic entry criteria are intended to ensure economic convergence – they are known as the
'convergence criteria' (or 'Maastricht criteria') and were agreed by the EU Member States in
1991 as part of the preparations for introduction of the euro.
In addition to meeting the economic convergence criteria, a euro-area candidate country must
make changes to national laws and rules, notably governing its national central bank
and other monetary issues, in order to make them compatible with the Treaty. In particular,
national central banks must be independent, such that the monetary policy decided by the
European Central Bank is also independent.
The Member States which were the first to adopt the euro in 1999 had to meet all these
conditions. The same entry criteria apply to all countries which have since adopted the euro
and all those that will in the future.”
29
European Commission. Economic and Financial Affairs. The Euro. Who can join and when
Joining the EURO AREA: Convergence Criteria (2)
To ensure sustainable convergence, the EC Treaty sets criteria which must be met by each EU Member
State before taking part in the third stage of EMU.
• Budgetary deficit to GDP not exceeds a reference value as 3%.
• The ratio of government debt to GDP not exceeds a reference value as 60%.
• There must be a sustainable degree of price stability and an average inflation rate, observed over a period
of one year before the examination; which does not exceed by more than 1.5 points that of the three best
performing Member States in terms of price stability;
• There must be a long-term nominal interest rate which does not exceed by more than 2% points that of
the three best performing Member States in terms of price stability;
• The normal fluctuation margins provided for by the exchange rate mechanism must be respected without
severe tensions for at least the last two years before the examination.
Monitoring the Maastricht Criteria
• Monitoring of interest rates and inflation is not necessary (single policy of the ECB)
• On fiscal policy, national governments present „stability programmes“ showing their fiscal policy plans over
the next 4 years (goal: Zero-Deficit at the end of the planning horizon)
• Deficits above 3 % are allowed if country is in a deep recession (GDP –2%) or hit by severe disturbances
not under the influence of fiscal policy
• Early warning, when deficit comes close to 3%: Government must propose actions how to reduce deficits
(also for non-Euro-states!)
• Excessive deficit procedure: When deficit is above 3% of GDP, Ministerial council decides about
procedure.
If member country fails to meet the deficit criterion, European Council can decide on measures.
30
Joining the EURO AREA: Convergence Criteria (3)
What is
measured:
How it is
measured:
Sustainable
Sound public
Price stability
public
finances
finances
Consumer
Government Government
price inflation deficit as % debt as % of
rate
of GDP
GDP
Not more
than 1.5
percentage
points above
Convergence the rate of
criteria:
the three
best
performing
Member
States
Reference
value: not
more than
3%
Reference
value: not
more than
60%
Durability of Exchange
convergence rate stability
Long-term
interest rate
Deviation
from a
central rate
Not more
than 2
percentage
points above
the rate of
the three
best
performing
Member
States in
terms of
price stability
Participation
in ERM II for
at least 2
years without
severe
tensions
31
Joining the EURO AREA: Convergence Criteria (4)
”Who decides if the convergence criteria are met?
According to the Treaty, at least once every two years, or at the request of a
Member State with a derogation, the Commission and the European Central Bank
assess the progress made by the euro-area candidate countries and publish their
conclusions in respective convergence reports.
On the basis of its assessment, the Commission submits a proposal to the Council
which, having consulted the European Parliament, and after discussion in the
Council, a meeting among the heads of state or government decides whether the
country fulfils the necessary conditions and may adopt the euro. If the decision is
favourable, the Council abrogates the derogation and, based on a Commission
proposal, having consulted the ECB, adopts the conversion rate at which the
national currency will be replaced by the euro, which thereby becomes irrevocably
fixed.”
European Commission. Economic and Financial Affairs. The Euro. Who can join and when
32
Maastricht criteria as determined by the European Commission in May 1998
Inflation
Country
Government Budgetary Position
HICP
(a)
Deficit
[% of
GDP]
Jan. 1998
1997
Debt [% of GDP]
Exchange Rates
Long term interest rates
ERM
partici
-pation
(d)
March 1998
Jan. 1998
Change from previous year
1997
1997
1996
1995
Reference Value
2.7
3
60
7.8 (f)
Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
1.4
1.9
1.4
5.2
1.8
1.2
1.2
1.8
1.4
1.8
1.1
1.8
1.3
1.9
2.1
-0.7
2.7
4.0
2.6
3.0
-0.9
2.7
-1.7
1.4
2.5
2.5
0.9
0.8
122.2
65.1
61.3
108.7
68.8
58.0
66.3
121.6
6.7
72.1
66.1
62.0
55.8
76.6
-4.7
-5.5
0.8
-2.9
-1.3
2.4
-6.4
-2.4
0.1
-5.0
-3.4
-3.0
-1.8
-0.1
-4.3
-2.7
2.4
1.5
4.6
2.9
-9.6
-0.2
0.7
-1.9
0.3
-0.9
-0.4
-0.9
-2.2
-4.9
7.8
0.7
2.9
4.2
-6.8
-0.7
0.2
1.2
3.8
2.1
-1.5
-1.4
yes
yes
yes
yes (h)
yes
yes
yes
yes (j)
yes
yes
yes
yes
yes (k)
no
5.7
6.2
5.6
9.8 (i)
6.3
5.5
6.2
6.7
5.6
5.5
5.6
6.2
5.9
6.5
United Kingdom
1.8
1.9
53.4
-1.3
0.8
3.5
no
7.0
Europe Average
1.6
2.4
72.1
-0.9
2.0
3.0
Notes:
(a) Percentage change in arithmetic average of the latest 12 monthly harmonized indices of consumer prices (HICP) relative to the arithmetic average of the 12 HICP of the previou period.
(b) Council decisions of 26-Sep-94, 10-Jul-95, 27-Jun-96, and 30-Jun-97.
(c) A negative sign for the government deficit indicates a surplus.
(d) Average maturity 10 years; average of the last twelve months.
(e) Definition adopted: simple arithmetic average of the inflation rates of the three best-performing member countries in terms of price stability plus 1.5 percentage points.
(f) Definition adopted: simple arithmetic average of the 12-month average of interest rates of the three best-performing member countries in terms of price stability plus 2 percentage points.
(g) Commission is recommending abrogation.
(h) since March 1998
(i) Average of available data during the past 12 months.
(j) since November 1996.
(k) since October 1996.
Source: European Commission
6.1
33
Members of the EUROZONE
1) Austria
2) Belgium
3) Cyprus
4) Estonia
5) Finland
6) France
7) Germany
8) Greece
9) Ireland
10)Italy
11)Luxemburg
12)Malta
13)Netherlands
14)Portugal
15)Slovakia
16)Slovenia
17)Spain
Countries, using the EURO (320 million Europeans)
1) Andorra
2) Austria
3) Belgium
4) Cyprus
5) Estonia
6) Finland
7) France
8) Germany
9) Greece
10) Ireland
11) Italy
12) Kosovo
13) Luxembourg
14) Malta
15) Monaco
16) Montenegro
17) Netherlands
18) Portugal
19) San Marino
20) Slovakia
21) Slovenia
22) Spain
23) Vatican City
34
EU Eurozone (17)
EU states obliged to join the Eurozone once they fulfil the entrance criteria (8)
EU state with an opt-out on Eurozone participation (UK)
EU state with an opt-out which may be abolished by a future referendum (Denmark)
States outside the EU with issuing rights (3)
Other non-EU users (4)
35
http://en.wikipedia.org/wiki/G-20_major_economies
New Member States: Moving toward Convergence?
CPI inflation rates in the EMU accession countries, 2004 – 2007 (annual rate in %)
Lipinska, A (2008). The Maastricht Convergence Criteria and Optimal Monetary Policy for the EMU Accession Countries. ECB Working Paper Series, No 896.
New Member States: Moving toward Convergence?
Nominal exchange rate fluctations versus euro of the accession countries,
2006 – 2008 (average monthly change since the EU accession date)
Lipinska, 2008.
New Member States: Moving toward Convergence?
Correlation Coefficient of Visegrad countries‘ currencies and EURO against USD, 1994-2005
Value of 1 = currency area
Source: CNB
New Member States: Moving toward Convergence?
Zloty against Euro and US Dollar, Q1-2000 – Q3-2013
Source: National Bank of Poland
Exchange Rate Mechanism II (ERM II)
”The Agreement of 16 March 2006 between the European Central Bank and the
national central banks (NCBs) of the Member States outside the euro area layed
down the operating procedures for an exchange rate mechanism in stage three of
the Economic and Monetary Union (EMU).
Participation in ERM II is optional for the non-euro area Member States, but those
Member States with a derogation can be expected to join. ERM II ensures that
participating Member States orient their policies to stability and convergence,
helping them in their efforts to adopt the euro.
A central rate is determined between the euro and each participating non-euro area
currency, with a standard fluctuation band of 15% above and below that rate. All
parties to the mutual agreement on the central rates, including the European
Central Bank, have the right to initiate a confidential procedure to reconsider the
rates.
Decisions are taken by common accord by the ministers of the euro area Member
States, the ECB and the ministers and central bank governors of the non-euro area
Member States participating in the new mechanism, in accordance with a common
procedure involving the Commission and following consultation of the Economic
and Financial Committee.
Under the Agreement, intervention is, in principle, effected in euro and the
participating currencies. The ECB and the NCB or NCBs concerned inform each
40
other about all foreign exchange intervention.” European Commission. Summaries of EU legislation.ERM
Monetary Policy
41
Monetary Policy in the European Union: European Central Bank
“The primary objective of the Eurosystem shall be to maintain price stability.
The Governing Council aims to maintain inflation rates at levels below, but close to,
2% over the medium term.“
ECB. Facts
42
Evaluating ECB‘s Monetary Policy
Two levels of evaluation:
- Euro area as a whole
- Individual member states of the euro area
The evaluation has to take into account the external shocks, esp. the 2007 financial
crisis.
“....monetary policy was too accomodative throughout much of the history of the
ECB, particularly during periods of economic expansion. ..To the extent that the New
Keynesian framework provides a reasonable representation of the euro-area
economy, the ECB monetary policy has been quite appropriate in responding to the
changing economic conditions in the euro area, especially over the periods of an
economic downturn.
Even though monetary policy is found to be appropriate for the euro area as a whole,
there is evidence of disparities from the standpoint of individual
Member countries. In particular, the ECB appeared to have reacted more
aggressively to changing economic conditions in the major “core“ members, such as
France and Germany. On the other hand, monetary policy was too loose for some
“peripheral“ countries, such as Ireland and Portugal, which experienced relatively
high inflation at times. This contrast highlights one of the challenges in implementing
monetary policyfor a region with heterogeneous national economic conditions.“
Lee, J and Crowley, P (2010). Evaluating the Monetary Policy of the European Central Bank. Federal Reserve Bank of Dallas.
Euro Crisis vs. Global Crisis:
Is the ECB Acting Differently to Other Central Banks?
Main Characteristics of Central Bank Mandates
Source: Pisani-Ferry, J. and Posen, A.S. (2010). From Convoy to Parting Ways?
Euro Crisis vs. Global Crisis:
Is the ECB Acting Differently to Other Central Banks?
The Period 2007-2010
ECB, Fed, BoE; Similarity in interest rate policies after Lehmann shock
45
Source: Pisani-Ferry, J. and Posen, A.S. (2010). From Convoy to Parting Ways?, p. 12.
Euro Crisis vs. Global Crisis:
Is the ECB Acting Differently to Other Central Banks?
“The ECB has consistently rejected the ideas that it either had to go beyond the provision of
liquidity to banks, to overcome the zero bound through purchasing of government bonds, or
to attempt to influence the shape of the yield curve. The asset purchase programmes it
announced (a covered bonds purchase programme in 2009 and a sovereign bonds purchase
programme in 2010) were intended to be of limited magnitude and to be sterilized so as to
have no impact on aggregate money supply. Consistent with this approach, the ECB’s
balance sheet increased expanded by far less than those of the two other central banks.
Also credit easing (i.e. specific asset purchase programmes undertaken with the
aim of restoring liquidity in asset market segments) was undertaken by all three
central banks, but to an uneven degree.The Fed undertook early on to unfreeze
clogged market segments such as the commercial paper as well as student loan
and other securitization markets. The BoE offered a commercial paper facility,
but had few takers. Through the early stages of the crisis, the ECB was satisfied
with its liquidity provision measures to the banking system, perhaps because of
the greater importance of bank lending versus securities markets in the Euro Area.
As indicated already, the ECB did undertake credit easing actions, however, at a late
stage after the Greek crisis erupted in early 2010 and it did it with evident reluctance, without
having stated its aims, and only for a rather short period.”
Source: Pisani-Ferry, J. and Posen, A.S. (2010). From Convoy to Parting Ways? p. 12
ECB‘s conservative asset purchasing program before the Greece crisis emerged
Central Bank‘s balance sheet, 01/2007 – 03/2010
47
Source: Pisani-Ferry, J. and Posen, A.S. (2010). From Convoy to Parting Ways?, p. 13.
ECB‘s Lack of Quantitative Easing?
“For all three central banks, broad money growth went way down after the crisis (less so on
this measure for the UK than for the US or Euro Area). In fact, the largest sustained decline
in trend monetary growth versus pre-crisis average has taken place in the Euro Area,
perhaps as a result of the lack of quantitative easing undertaken by the ECB. Remember,
this is broad money so a measure of credit outcomes, not of an instrument like base money
which the central bank controls.
(Quantitative easing is a substitute for interest rate policy when traditional monetary stimulus
has reached its limits and/or been frustrated by financial instability.)”
Source: Pisani-Ferry, J. and Posen, A.S. (2010). From Convoy to Parting Ways?, p. 13-14.
Summary for the Period 2007 - 2010
“In the end, central bank policy reactions to the crisis demonstrated both remarkable
initial convergence in view of dissimilar traditions and institutional constraints across
the Atlantic, and significant divergences in policy strategy, the instruments used, and
ultimately on the outlook once the worst had passed. Even the sovereign debt crisis of
spring 2010 did not prompt greater activism from the ECB beyond immediate and
targeted liquidity provision. On the basis of the track record this far and the policy
announcements made, we posit that divergences are likely to grow larger in the
aftermath of the recovery.”
Source: Pisani-Ferry, J. and Posen, A.S. (2010). From Convoy to Parting Ways?, p. 16.
“Throughout the first stages of the crisis, similar to other central banks in high income
countries, the ECB addressed the unprecidented liquiditiy problems across a broad
spectrum of financial institutions by extending the volume and average maturity of its
liquidity provision.“
Source: Gabor, D. (2011), The ECB and the European Debt Crisis, p. 4.
“The ECB’s actions since the onset of the financial crisis have been bold, and yet
firmly anchored within the medium-term framework of our monetary policy strategy.”
Former ECB President Trichet, 2009
.
ECB: Its Emerging
Active Role in Europ.
Sovereign Debt Crisis
Sept. 2008
Lehman Brothers
US Fed, BofE, BofC, BofJ
Credit easing
(purchase of private assets)
January 2010
Onset of European
sovereign debt crisis
(Greece)
November 2010
March 2009
Oct. 2009
US Fed, BofE
Quantitative easing
US Fed
QE completed
Feb. 2010
Sept
Nov
Jan
2009
Mar
May
Jul
Sept
Nov
IRELAND bailout
BofE
QE completed
(purchase of sovereign assets)
Jul
2008
US Fed
Second QE round
Jan
2010
Mar
May
April 2011
PORTUGAL
bailout
Jul
Sept
Nov
Jan
2011
Mar
May
GREECE bailout
ECB
Covered bonds
program
ECB
Enhanced credit support
ECB
Securities Market
program
(Credit easing)
July 2009
(Bank refinancing vs. market
interventions)
May 2010
ECB
October 2008
ECB
Announcement CBPP
1year LTRO
May 2009
Initiation phasing out
LTRO
Dec. 2009
ECB
‘Addicted to liquidity’
Sept. 2010
ECB
Phasing out
6m and 1y LTRO
European Financial
Stability Facility
June 2010
Source: Gabor, D. (2011), The ECB and the European Debt Crisis, p. 6.
ECB
Interest rate rise
(Separation Principle)
SMP Suspended
European Stability
Mechanism
March 2011
ECB and the Crisis: 3 Turning Points
Source: Gabor, D. (2012), The ECB and the European Crisis.
Point 1, May 2009: strategic
appropriation (CBP)
Point 2, May 2010: sound
money or too little, too late?
Implicit analytical recognition
that sovereign debt
instruments are special
Point 3, March 2011:
putting politics in its
place
ESM as crisis
resolution mechanism
Commitment to
LTROs
Source: Gabor, D. (2012), The ECB and the European Crisis.
ECB and the Crisis: The 4th Turning Point –
Outright Monetary Transactions ("OMT")
“On 2 August 2012, the Governing Council of the ECB announced that it would
undertake outright transactions in secondary, sovereign bond markets, aimed
"at safeguarding an appropriate monetary policy transmission and the singleness
of the monetary policy." The technical framework of these operations was
formulated on 6 September 2012.
OMT denotes the European Central Bank's purchases in secondary, sovereign
bond markets, under certain conditions, of bonds issued by Eurozone member-states.
OMT is considered by the European Central Bank once a Eurozone
government asks for financial assistance. From ESM and ESFS and through OMT,
the Eurozone's central bank can, henceforth, buy government-issued bonds that
mature in 1 to 3 years, provided the bond issuing countries agree to certain domestic
economic measures - the latter being the so-called term of ‘conditionality’.
The aim is to bring bond yields, at the long end of the curve (i.e. 10 years), down to
levels that lower borrowing costs for countries that face problems selling debt, and,
thus, provide investors with confidence in the euro for them to buy up bonds in a
normal market.
OTM are not the same as Quantitative Easing operations, since, in the latter, the
central banks buy bonds and, by doing so, inject liquidity into the banking system,
with the aim of stimulating economic activity. The ECB has made clear1 that the
principle of "full sterilisation"3 will apply, whereby the bank will be absorbing back
the money pumped into the system ‘by any means necessary’.”
Source: http://en.wikipedia.org/wiki/Outright_Monetary_Transactions
54
Source: http://en.wikipedia.org/wiki/File:Long-term_interest_rates_(eurozone).png
Summing up:Bank-based and Market based Crisis Measures, ECB, 2008-2011
Gabor, D. (2012), The Power of Collateral: the ECB and Bank Funding Strategies in Crisis, p. 24.
……and the future?
ECB: Secret Bailout Strategy Under the EU Rescue Umbrella?
56
Greece Lightening
57
Economist, Nov. 05, 2011.
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