Towards a Stronger EMU: Recent Developments in Monetary Policy and EMU Governance Reform Gilles Noblet Deputy Director General DG International and European Relations European Central Bank Presentation at the EESC Hearing, Brussels, 19 February 2013.
Improvements in financial markets ECB non-standard measures and OMT Adjustment of competitiveness and fiscal positions Towards a stronger economic union 2
Recent stress driven by bond markets Sovereign 10-year yield spreads vis-à-vis Germany Are the markets right? Were the markets right? Source: ECB. Latest observation: 11 February 2013. 3
Feedback loops between banks and sovereigns Source: Thomson Reuters. 4
Limited pass-through of interest rate decisions Cumulated changes in the ECB policy rate and bank lending rates for short-term MFI loans to non-financial corporations (changes in percentage points) range of changes in bank lending rates a) Pass-through 2002-2003 minimum bid rate in main refinancing operations b) Pass-through 2011-2012 1.0 1.0 1.0 1.0 0.5 0.5 0.5 0.5 0.0 0.0 0.0 0.0-0.5-0.5-0.5-0.5-1.0-1.0-1.0-1.0-1.5-1.5-1.5-1.5 Source: ECB calculations. Notes: The range defined by the 20th to 80th percentile lines identifies the development of short-term bank lending rates covering three-fifths of the interest rate observations of euro area countries. At the same time, this excludes respectively one-fifth of the observations above and below the lines. Latest observation is for July 2012. 5
Improvements in financial markets ECB non-standard measures and OMT Adjustment of competitiveness and fiscal positions Towards a stronger economic union 6
ECB Non-Standard Measures and EONIA Introduction of supplementary 3-month LTRO Announcement fixed-rate full allotment First 1-year LTRO and start of the CBPP Start Securities Markets Programme First and Announcement Reactivation Outright Securites Markets second 3-year LTROs Monetary Programme Transactions 6 5 4 3 2 1 0 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 main refinancing / minimum bid rate overnight interest rate (EONIA) deposit rate marginal lending rate Source: ECB Latest observation: 25 January 2012 7
Sovereign bond markets and monetary policy transmission Sovereign bond markets Stress in sovereign bond markets adversely affects the funding conditions of banks through various channels Bank funding conditions Availability of Liquidity: Government bonds are widely used as collateral Strength of the Balance Sheet: Risk of losses on government bond portfolios held by banks Funding costs of banks: Government bond yields set a floor for other interest rates Funding of the real economy Funding conditions of banks determine the cost and availability of credit of the non-financial private sector 8
Rationale for Outright Monetary Transactions (OMTs) Modalities of OMTs were decided at the Governing Council meeting on 6 September 2012 (See next slide) Underlying rationale for OMTs High and volatile premia in some government debt markets that originate partly from fear about the reversibility of the euro Redenomination risk and distortions in government bond markets cause severe funding difficulties for banks and a rise in funding costs This prevents the accommodative monetary policy stance from reaching the real economy in some euro are countries Objectives of OMTs Safeguard an appropriate monetary policy transmission mechanism Preserve the singleness of the monetary policy Better align funding conditions of the real economy with the key interest rates Effective backstop to eliminate tail risks associated with fear of a euro break up 9
Principles and Modalities of OMT Principles / Modalities Conditionality(activation of EFSF/ESM) ECB decides on purchases in full independence Noex ante limit Bonds with 1-3 years maturity Intervention only in countries with market access Sterilisation of additional liquidity a fully effective backstop to avoid destructive scenarios 10
Improvements in financial markets ECB non-standard measures and OMT Adjustment of competitiveness and fiscal positions Towards a stronger economic union 11
Ongoing process of competitiveness adjustment Unit labour costs in euro area countries, nominal (index 1998 Q4 = 100, based on sa data) Euro area Italy Spain Greece Ireland Portugal Slovenia Cyprus 150 145 140 135 130 125 120 115 110 105 100 95 1998 Q11999 Q12000 Q12001 Q12002 Q12003 Q12004 Q12005 Q12006 Q12007 Q12008 Q12009 Q12010 Q12011 Q12012 Q1 150 145 140 135 130 125 120 115 110 105 100 95 Source: Eurostat. Quarterly data up to 2012Q3, except Greece (2011Q1). Cyprus is based on annual data, up to 2011. Note: The ULC indices are set to 100 in the last quarter before the euro area accession of the respective country. The ULC developments presented for Greece and Portugal might differ from the calculations made by the National Central Banks. The quarterly pattern in Greek ULC is affected by substantial volatility in quarterly compensation of employees figures. 12
Improvement of current account deficits in stressed countries Current account balances (in % of GDP) in selected euro area countries 10 Average 1999-2009 2010 2011 5 0-5 -10-15 EA IT IE SI ES CY PT GR Source: European Commission, Autumn 2012. Note: Countries are ranked in descending order according to the average balance over the period 1999-2009. 13
Improvements in financial markets ECB non-standard measures and OMT Adjustment of competitiveness and fiscal positions Towards a stronger economic union 14
The shortcomings in EU s economic governance 1. Failure of market discipline Presumption of rational behaviour Solidarity vs. no bail-out clause 2. Failure to enforce rules of fiscal policy framework - Insufficient internalisation of EU rules at national level Practice of non-interference and weak enforcement by Commission, Eurogroup/EU Council (sanctions never used) 3. Lack of a competitiveness framework Lack of surveillance of competitiveness and macro imbalances Processes of surveillance and coordination were nonbinding 15 4. No crisis resolution mechanism to provide financial support
A long-term vision for EMU Four Presidents reports (June, October, December 2012) Financial union Fiscal union EMU Economic union Addresses structural problems in a comprehensive manner Reinforces irreversibility of the euro Political union 16
Financial union Single Supervisory mechanism (involving the ECB) Single Rulebook European Resolution Authority and fund Harmonisation of deposit insurance schemes 17
The ECB as the Single Supervisor Banks under direct ECB supervision Value of total assets of over 30bn Representing over 20% of a country s GDP Or receive direct ESM financing Entry into force 1 March 2014 or later Supervisory Board Takes decisions by simple majority Regulations adopted by combination of qualified and simplified majority Establishment of a steering committee Simplified procedure for Treaty revision Review of SSM foreseen for 2015 18
Towards a genuine EMU the way forward European Council (EC) set out next steps in the process of completing EMU on 13 December: Completion and implementation of enhanced economic governance framework Adoption of single supervisory mechanism Commission shall present a proposal for a single resolution mechanism in 2013 A number of other important issues will be further examined by the June 2013 European Council: Reform contracts with Member States to remove structural reform bottlenecks Solidarity mechanisms Systematic assessment of labour and product markets in EMU with a view to promoting jobs and growth Need for swift implementation and commitment to further steps 19
Thank you Email: Gilles.Noblet@ecb.europa.eu 20
Background Slides 21
Improvements in financial markets ECB non-standard measures and OMT Adjustment of competitiveness and fiscal positions Towards a stronger economic union 22
Background: Sovereign yield curves of Italy and Spain 6.0 % Italy 5.0 4.0 3.0 2.0 1.0 0.0 17/12/2012 06/09/2012 07/06/2012 3M 6M 1 2 3 4 5 6 7 8 9 10 % 7.0 6.0 5.0 4.0 3.0 Spain 2.0 1.0 0.0 17/12/2012 06/09/2012 07/06/2012 3M 6M 1 2 3 4 5 6 7 8 9 10 23
Improvements in financial markets ECB non-standard measures and OMT Adjustment of competitiveness and fiscal positions Towards a stronger economic union 24
Background: Details on Outright Monetary Transactions (OMTs) A necessary condition for OMTs is strict and effective conditionality associated with an appropriate EFSF/ESM programme This can be a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (e.g. Enhanced Conditions Credit Line) provided that they include the possibility of EFSF/ESM primary market purchases OMTs will be terminated if there is non-compliance with the macroeconomic adjustment or precautionary programme OMTs also possible for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access OMTs will be focused on bonds with maturities from 1 up to 3 years No ex ante quantitative limits are set on the size of OMTs The Eurosystem accepts the same (pari passu) treatment as private or other creditors Liquidity created through OMTs will be fully sterilised Aggregate OMT holdings and their market values will be published weekly 25
Background: Additional non-standard measures adopted on 6 September The Governing Council decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the following assets: marketable debt instruments issued or guaranteed by the central government credit claims granted to or guaranteed by the central government, of countries that are eligible for OMTs or are under an EU-IMF programme and comply with the attached conditionality as assessed by the Governing Council marketable debt instruments denominated in the US dollar, the pound sterling and the Japanese yen, and issued and held in the euro area 26
Background: Actions comparable to other central banks Since 2007 (2007=100) In % of GDP 450 400 350 300 250 200 Eurosystem Federal Reserve Bank of England Bank of Japan 30% 25% 20% 15% Eurosystem Federal Reserve Bank of England Bank of Japan 150 10% 100 50 5% 0 0% 27
Improvements in financial markets ECB non-standard measures and OMT Adjustment of competitiveness and fiscal positions Towards a stronger economic union 28
Background: Need for further fiscal adjustment General government gross debt in the euro area (% of GDP) 180 160 140 120 100 80 60 40 20 2007 2011 0 EE LU SK SI FI NL ES MT CY AT DE FR EA BE IE PT IT GR Source: ECB. 29
Background: Ongoing process of fiscal adjustment General government deficit/surplus in the euro area (% of GDP) 6,0 2009 2011 3,0 0,0-3,0-6,0-9,0-12,0 ES GR IE SI CY FR SK NL PT EA IT BE MT AT DE FI LU EE Source: ECB. Note: Budget balance for Ireland adjusted for government support to the financial sector. 30