Wednesday, January 21, 2015

Interview with ECB Board Member ahead of January 22nd Meeting

Thursday (January 22nd) the governing council of the ECB will meet to discuss a possible ramp up of a new QE program for the EU. There is an expectation that the ECB will begin to buy government bonds of EU member nations. In this interview with ECB Board Member Benoit Coeure', he pretty much confirms that is likely to be announced. Below a few excerpts from this interview posted on the Bank of International Settlements web site. Just click either link to read the entire interview.


Why has the euro area become a black hole for growth?

The trend of slow growth is not only affecting the euro area, but all developed countries. In Europe, it is also linked to insufficient technological innovation and a lack of dynamism and openness in the economy, and even in societies themselves.
Only six months ago the ECB dismissed any risk of deflation. Yet prices have begun to fall-
The euro area is not in deflation. But there is a risk, which got worse last summer, that growth and inflation remain weak in the long term and that we fall into a "1% economy": growth at 1% and inflation at 1%. This outlook is dangerous enough to be a concern to everybody. European leaders must mobilise all instruments (monetary, budgetary, structural reforms) so that growth picks up in a sustainable way. It's imperative that we, national governments and European institutions, take joint action to rapidly revive economic activity. This imperative has become even more pressing in light of the Paris attacks, which targeted the European values of freedom of expression, freedom of the press and freedom itself. In my opinion, the attacks have further highlighted, if possible, the fact that certain young people remain marginalised, dropouts, with no job, and at risk in extreme cases of turning to delinquency or even terrorism. Without growth, this can only get worse. Unity among Europeans is a must, including in economic matters. Europe needs a strong economy if it is to defend its values.

So the ECB is ready to pursue US-style quantitative easing, that is, repurchasing government bonds?

The Governing Council will meet on 22 January. The discussion will be about the composition and the scale of our purchases of assets on the markets and the base scenario, if we want to do more, would be to acquire public debt on a large scale on the secondary market (Editor's note: the resale market and not directly from governments). Until now, we have done it in a targeted way for securities (covered bonds and ABS), which contribute directly to financing the economy.

Will these purchases be capped and will they involve all the countries?

That's a discussion that the Governing Council will have on 22 January. We will take into account the American and British experiences in order to decide on the amount of securities to buy in order to restore confidence in inflation returning to a level close to, but below, 2%, while bearing in mind the economic and institutional specificities of the euro area. We also have to decide if the repurchases will focus on the debt of certain countries or if they should be weighted across the whole of the euro area.

If QE fails, you won't have any more ammunition.

Throughout the crisis, the ECB has devised efficient instruments to face up to new situations, while remaining within the framework of its mandate. But let's not delude ourselves: the efficiency of what we do will depend largely on what the governments are doing and will do in respect of budgets and structural reforms, quite simply because monetary policy has no impact on growth over the long term. That depends on the productivity of the economy, on human capital, the quality of education, social cohesion and also on the fact that public debt has come back under control. But note that that doesn't mean that we should expect the governments to take steps before we do what we have to do as a central bank. That would be an easy way; it is not my idea of the ethics of responsibility for those who bear public responsibilities, and this is not in accordance with the text of the European treaties, which require us to fulfil our mission whatever may happen.

The eurosceptic parties are gaining strength at each election and it shows that people are fed up with current policies, which are reflected in social decline. Isn't there a risk that the states are politically paralysed?

That they are fed up is no surprise! One cannot blame the people for that; it's a moral and democratic question. It's up to the European authorities and the governments to show that they can create growth and push down unemployment - something they haven't managed to do convincingly since the crisis started. Now the risk is that this fed-up sentiment creates a spiral of defiance: if there are no convincing results, people's confidence in European institutions and in the community construction is undermined. There is no solution without Europe: one cannot sustainably boost French growth if there's no strengthening of German and Italian growth. In some area it's even necessary to have "more" Europe. But to achieve this, it's necessary to restore people's confidence in Europe and to do that growth is needed. Hence the symbolic importance of the Juncker plan, which shows the determination of the governments to create growth.


My added comments: 

This is a very good Q&A session with open and honest answers from Mr. Coeure'. He acknowledges that the central bank can only do so much to try and buy time and that eventually the real economy must perform. He notes if the institutions fail to create improved economic conditions, they should not be surprised when the people get frustrated and upset. 

The key ingredient that the whole current debt based monetary system relies on is confidence. People must have confidence in their leaders and their currencies. If that confidence fails for any reason, the task of regaining it becomes much harder going forward. The recent episode with the Swiss National Bank is just one example. If we see more "unexpected surprises" from more central banks, it could impact confidence that they can manage problems. Something we will need to watch closely this year. We will have a couple of articles related to that subject this weekend.

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