By Pierre Aldama and Jérôme Creel
At the euro zone summit in December 2018, the heads of state and government hit the brakes hard on the reform of fiscal governance: among the objectives assigned to the euro zone’s common budget that they are wishing for, the function of economic stabilization has disappeared. This is unfortunate, since this function is the weak point of the fiscal rules being pursued by the Member States. Continue reading “Europe’s fiscal rules – up for debate”
By Jérôme Creel and Francesco Saraceno [1]
At age twenty, the euro has gone through a difficult adolescence. The success of the euro has not been aided by a series of problems: growing divergences; austerity policies with their real costs; the refusal in the centre to adopt expansionary policies to accompany austerity in the periphery countries, which would have minimized austerity’s negative impact, while supporting activity in the euro zone as a whole; and finally, the belated recognition of the need for intervention through a quantitative easing monetary policy that was adopted much later in Europe than in other major countries; and a fiscal stimulus, the Juncker plan, that was too little, too late. Continue reading “The euro is 20 – time to grow up”
The spectre of a sovereign debt crisis in Italy is rattling the euro zone. Since Matteo Salvini and Luigi di Maio came to power, their headline-catching declarations on the budget have proliferated, demonstrating their desire to leave the European budgetary framework that advocates a return to an equilibrium based on precise rules[1]. Hence the announcement of a further deterioration in the budget when the update of the Economic and Financial Document was published at the end of September 2018 frayed nerves on the financial markets and triggered a further hike in bond rates. (graphic). Continue reading “Italy’s debt: Is the bark worse than the bite?”
By Bruno Ducoudré, Xavier Timbeau and Sébastien Villemot
Current account imbalances are at the heart of the process that led to the crisis in the euro zone starting in 2009. The initial years of the euro, up to the crisis of 2007-2008, were a period that saw widening imbalances between the countries of the so-called North (or the core) and those of the South (or the periphery) of Europe, as can be seen in Figure 1. Continue reading “Major adjustments are awaiting the euro zone”
While the momentum for growth has lost steam in some countries – Germany, France and Japan in particular – GDP in the United States is continuing to rise at a steady pace. Growth could even pick up pace in the course of the year as a highly expansionary fiscal policy is implemented. In 2018 and 2019, the fiscal stimulus approved by the Trump administration – in December 2017 for the revenue component, and in February 2018 for the expenditure side – would amount to 2.9 GDP points. This level of fiscal impulse would come close to that implemented by Obama for 2008. However, Trump’s choice has been made in a very different context, since the unemployment rate in the United States fell back below the 4% mark in April 2018, whereas it was accelerating 10 years ago, peaking at 9.9% in 2009. The US economy should benefit from the stimulus, but at the cost of accumulating additional debt. Continue reading “Trump’s budget policy: Mortgaging the future?”
By Christophe Blot, Jérôme Creel and Paul Hubert
The President of the European Central Bank, Mario Draghi, recently announced that the increase in the ECB’s key interest rate would come “well past” the end of the massive purchases of bonds (scheduled for September 2018), mainly issued by the euro zone countries, and at a “measured pace”. The increase in the key rate could therefore occur in mid-2019, a few weeks before the transfer of power between Mario Draghi and his successor. Continue reading “The ECB is still worried about the weakness of inflation”
By Christophe Blot, Jérôme Creel and Paul Hubert
By adjusting the size and composition of their balance sheets, the central banks have profoundly changed their monetary policy strategy. Although the implementation of these measures was initially envisaged for a period of crisis, questions are now arising about the use of the balance sheet as an instrument of monetary policy outside periods of crisis. Continue reading “What role for central bank balance sheets in the conduct of monetary policy?”
By Christophe Blot and Jérôme Creel
The involvement of the European Central Bank (ECB) in the fiscal management of the euro area member states has been a subject of ongoing controversy. Since the implementation of the ECB programme to purchase sovereign debt, it has been accused of profiting off of troubled states and taking the risk of socializing losses. The rise of these controversies results from the difficulty in understanding the relationship between the ECB, the national central banks (NCBs), and the governments. The European monetary architecture comes down to a sequence of delegations of power. Decisions on the conduct of monetary policy in the euro area are delegated to an independent institution, the European Central Bank (ECB). But, under the European subsidiarity principle, the implementation of monetary policy is then delegated to the national central banks (NCBs) of the euro area member states: the ECB and NCBs taken together are called the Eurosystem. While up to now this dimension of the organization of the euro area’s monetary policy has not attracted much attention, debate has recently arisen in the course of the implementation of the quantitative easing programme. According to commentators and journalists, some national central banks are profiting more than others from the policy of buying and supporting their national public debts, which are riskier than the debt in more “virtuous” countries[1]. The profiting banks are viewed as escaping the ECB’s control and not strictly applying the policy decided in Frankfurt.
In a recent paper prepared as part of the European Parliament’s Monetary Dialogue with the ECB, we show that these concerns are unfounded for the simple good reason that, on average, since the beginning of the implementation of this policy, the theoretical distribution key has been respected (graphic). This distribution key stipulates that purchases of bonds by the Eurosystem are to be made pro rata to a state’s participation in the ECB’s capital. Remember that part of the purchases – 10 of the 60 billion in monthly purchases made under the programme – are made directly by the ECB[2]. The other purchases are made directly by the NCBs. As each central bank buys securities issued by its own government, the NCBs’ purchases of public bonds do not entail risk-sharing between member states. Any profits or losses are kept on the NCBs’ balance sheets or transferred to the national governments in accordance with the agreements in force in each country.
This distribution of public bond purchases, which is intended to be neutral in terms of risk management, isn’t entirely so, but not for the reasons that seem to have worried the European Parliament’s Committee on Economic and Monetary Affairs. This distribution favours the maintenance of very low rates of return on the debts of certain member states. In fact, by not basing itself on the financing needs of the member states or on the size of their public debts, it can produce distortions by reducing the supply of public bonds available on the secondary markets. Such may be the case in Germany, Spain and the Netherlands, whose shares of the European public debt are smaller than their respective shares in the ECB’s capital (table). Conversely, the purchases of Italian bonds are smaller with the current distribution key than they would be with a distribution key that took into account the relative size of the public debt. The ECB’s policy therefore has less impact on the Italian debt market than it does on the German market.
This orientation could also constrain the ECB’s decision about continuing quantitative easing beyond December 2017. Let’s agree that the ECB’s best policy would be to continue the current policy beyond December 2017, but to stop it once and for all in July 2018. Given the current distribution rules, this policy would be subject to all countries having exchangeable government bonds until July 2018, including those who issue public debt only rarely because they have low financing needs. It could be that it is impossible to continue this policy under the rules currently adopted by the ECB, because some countries do not have sufficient debt available. It would then be necessary to implement a different policy by drastically reducing the monthly purchases of short-term securities (say in January 2018), while possibly pursuing this policy for a longer time period (beyond the first half of 2018). The decision not to use risk-sharing in the management of European monetary policy is therefore far from being neutral in the way this policy is actually implemented.
[1] Mario Draghi was questioned about the distribution of the public sector purchase programme (PSPP) at the press conference he held on 8 September 2017.
[2] There is risk-sharing on this sum: the gains or losses are shared by all the NCBs in proportion to their contribution to the ECB’s capital.
By Catherine Mathieu and Henri Sterdyniak
“Growth and Inequality: Challenges for the Economies of the European Union” was the theme of the 14th EUROFRAME Symposium on Economic Policy Issues in the European Union held on 9 June 2017 in Berlin. EUROFRAME is a network of European economic institutes that includes DIW and IFW (Germany), WIFO (Austria), ETLA (Finland), OFCE (France), ESRI (Ireland), PROMETEIA (Italy), CPB (Netherlands), CASE (Poland) and NIESR (United Kingdom). Since 2004, EUROFRAME has organized a symposium on an important subject for the European economies every year. Continue reading “Growth and inequality in the European Union”
By Christophe Blot and Paul Hubert
At the press conference following the meeting of the ECB’s Governing Council on Thursday, 8 June, Mario Draghi announced that the Bank’s key interest rates would remain unchanged (0% for the main refinancing operations rate, a negative 0.40% for the deposit facility rate and 0.25% for the lending facility rate). In particular, Draghi gave some valuable insights into the future direction of the euro zone’s monetary policy by changing its message. Whereas he had systematically stated that rates could be cut (“at lower levels”), he now stated that they would be maintained at the “present level” for an “extended period of time” and “well past the horizon of our net asset purchases”. Continue reading “The European Central Bank is readying the future”
