Opinion

The ECB is much too stodgy

The euro fuelled a leveraged bet that went bad. The ECB is best positioned to orchestrate the painful sharing of losses. If the ECB does not reinvent itself for the times, it will be hobbled by its obsolescence and by increasingly acrimonious politics. And the flawed euro project will be further damaged.

By: Date: February 13, 2014 European Macroeconomics & Governance Tags & Topics

See also blog posts by Guntram Wolff ‘The ECB should be more aggressive on monetary policy‘ and ‘OMT ruling: Karlsruhe says no, refers to ECJ and suggests ECB should always be preferred creditor, by Marcel Fratzscher, Michael Hüther, Guntram B. Wolff ‘Taking the mandate of the ECB seriously‘.

This piece was published by BreakingViews on January 29th 2014.

The euro area’s incomplete monetary union arose from a political compromise in which the member states ceded monetary authority to a supranational agency while retaining their fiscal sovereignty. Because a banking union is ultimately a fiscal union, the latest "banking union" predictably comes without a meaningful centralised pot of money. Once again, the decision to "muddle ahead" has produced a muddle: costly delays and half measures, with cumbersome governance structures.

Unfortunately, the European Central Bank has also chosen to stay behind the curve. Disregarding its unique credibility, mandate, and means to heal and protect, the ECB has too often invoked worn euro area prejudices while exhorting the national authorities to act. It is past time for the central bank to be proactive on monetary policy, banks and sovereign debt.

The ECB’s tight monetary policy explains why the weakest of the advanced economies has the strongest currency and faces the greatest threat of deflation. The widespread surprise at its Nov. 7 decision to belatedly lower the policy rate is a testament to the ECB’s stodginess.

The other major central banks have had near-zero policy interest rates for much longer. Moreover, through early and aggressive quantitative easing (QE) – buying assets to lower long-term interest rates – the United States has achieved an effective policy rate of about -2.0 percent. In turn, the QE has served to weaken the dollar relative to other currencies. The Japanese yen bore the brunt of this pressure early on, until the Japanese engineered their own QE, which promptly caused the yen to depreciate. The consequence is a strong euro.

With its single-minded commitment to maintain annual price inflation below 2 percent, the ECB has felt no urgency in responding to euro-area economic weakness or to countering other central bank actions. With market expectations of inflation at about 1 percent a year over the next two years, the ECB’s insistence on waiting for more evidence of deflation is a dangerous gamble.

The ECB must push conventional and unconventional policy buttons to help a more robust euro-area recovery. Today, when the distressed periphery faces a painful and extended "internal devaluation" – more plainly, a large real wage reduction – a weaker euro is their best hope for a jump start.

The shrill German commentators who criticised the ECB’s Nov. 7 decision ignore that an aggressive monetary policy – and a weaker euro – offer Germany the least-cost option for restoring the euro’s economic and political viability. Unwilling to make large fiscal transfers for fear of being sucked into an open-ended commitment, Germany also has no simple way to engineer domestic inflation, even if its traditional anxieties could be set aside.

Stressed banks remain the euro area’s Achilles heel. Without centralised funds for recapitalising banks, the creditors will need to bear significant losses, ideally through debt-to-equity swaps. The ECB’s hesitations – allegedly due to the contagion bugbear – risk diluting and prolonging the process.

We are long past the moment when several banks should have closed down. Zombie banks weigh on the economy. The ECB could expeditiously force losses on bondholders of insolvent banks, since it is well-positioned to deal with contagion risk by providing liquidity to solvent institutions.

The taboos are greatest with regard to sovereign debt. The ECB has insisted that it will not engage in monetary financing – that is, it will not buy sovereign bonds on an open-ended basis; instead, sovereigns must preserve their bonds as risk-free assets. By making its support conditional on promises of good behaviour, the Outright Monetary Transactions (OMT) programme conflates solvency and liquidity.

The euro area needs unconditional ECB bond purchases alongside selective sovereign default. With default risk rendered more believable through, for example, sovereign "CoCos" (contracts that specify debt restructuring at pre-agreed levels of distress), the ECB should stand as a lender of last resort to solvent sovereigns. This is not monetary financing: it is maintaining financial stability.

The ECB’s political independence and technocratic goals have accorded it deference on controversial and fast-moving matters. Despite its flaws, the OMT was endorsed by German Chancellor Angela Merkel, over the fierce opposition of Jens Weidmann, the Bundesbank president and ECB governing council member.

Five years into the crisis, with the worst seemingly over, the temptation is to declare victory and improvise when new challenges emerge. That would be a mistake. The ECB must harness the deference it enjoys.

The euro fuelled a leveraged bet that went bad. The ECB is best positioned to orchestrate the painful sharing of losses. If the ECB does not reinvent itself for the times, it will be hobbled by its obsolescence and by increasingly acrimonious politics. And the flawed euro project will be further damaged.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article Download PDF

Policy Brief

Screen Shot 2017-02-17 at 16.42.38

Europe in a new world order

In this paper the authors explore what the EU’s strategic reaction should be to US diminishing giant policies, and the EU’s role in a world of declining hegemony and shifting balances

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: February 17, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

The Brexit bill: uncertainties in the estimate of EU pension and sickness insurance liabilities

Pension and sickness insurance liabilities for EU staff could be an especially contentious part of negotiations on an EU-UK financial settlement: the “Brexit bill”. This post looks behind the calculation of the alleged cost of pension benefits and concludes that it may be less than half of what it seems.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 17, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

The UK’s Brexit bill: could EU assets partially offset liabilities?

The ‘Brexit bill’ is likely to be one of the most contentious aspects of the upcoming negotiations. But estimates so far focus largely on the EU costs and liabilities that the UK will have to buy its way out of. What about the EU’s assets? The UK will surely get a share of those, and they could total €153.7bn.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 14, 2017
Read article More on this topic

Blog Post

MariaDemertzis1 bw
unnamed

The impact of Brexit on UK tertiary education and R&D

In this blog post, we look at the impact of Brexit on UK’s education and research and development sectors in terms of students and staff, as well as funding.

By: Maria Demertzis and Enrico Nano Topic: European Macroeconomics & Governance Date: February 14, 2017
Read article Download PDF More on this topic

External Publication

Screen Shot 2017-02-13 at 12.31.18

Improving the Responses to the Migration and Refugee Crisis in Europe

What must be done to over- come the intra-European conflict and achieve a bal- ance that produces common ground allowing for a po- litical and social consensus on migration?

By: Massimo Bordignon, Yves Pascouau, Matthias M. Mayer, Mehrdad Mehregani, Demetrios G. Papademetriou, Meghan Benton, Pedro Góis and Simone Moriconi Topic: European Macroeconomics & Governance Date: February 13, 2017
Read article More on this topic More by this author

Blog Post

Zsolt Darvas

Questionable immigration claims in the Brexit white paper

The UK government's white paper on Brexit suggested that the EU's "free movement of people" has made it impossible to control immigration. This seems to rest on an assumption that EU citizens can "move and reside freely" in any member state. Zsolt Darvas finds these arguments problematic, and points out that it is difficult to infer public opinion about immigration from the referendum result.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: February 8, 2017
Read about event More on this topic

Upcoming Event

Mar
22
11:30

Conversations on the future of Europe

On the occasion of the 60th anniversary of the signing of the Treaty of Rome, we will hold an event of four conversations between Bruegel scholars and European thinkers.

Speakers: Maria Demertzis, Emmanuel Mourlon-Druol, Johanna Nyman, André Sapir, Catherine Schenk, Guntram B. Wolff, Andre Wilkens and Ivan Krastev Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event

Past Event

Past Event

Brexit and trade: what EU and WTO rules imply

Bruegel in collaboration with Leuven Centre For Global Governance Studies organizes an event at which we will discuss the options for redesigning trade relations in the post-Brexit era.

Speakers: Viktoria Dendrinou, Hosuk Lee-Makiyama, Petros C. Mavroidis, André Sapir and Prof. Jan Wouters Topic: European Macroeconomics & Governance, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 6, 2017
Read article More by this author

Blog Post

ECB Board Members - Benoît Cœuré, Mario Draghi, Peter Praet, Sabine Lautenschlaeger, Vitor Constancio, Yves Mersch

Resolving Europe’s NPL burden: challenges and benefits

Keynote speech by Vítor Constâncio, Vice-President of the ECB, at Bruegel event: "Tackling Europe's non-performing loans crisis: restructuring debt, reviving growth", Brussels, 3 February 2017

By: Vítor Constâncio Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: February 3, 2017
Read about event

Past Event

Past Event

Tackling Europe’s non-performing loans crisis: restructuring debt, reviving growth

How can we connect the different initiatives for NPL resolution and identify an agenda that is shared between EU, national authorities and the private sector.

Speakers: Corso Bavagnoli, Iker Beraza, Arne Berggren, John Berrigan, Marco Buti, Vítor Constâncio, John Davison, Maria Demertzis, Sharon Donnery, Inês Drumond, Giorgio Gobbi, Piers Haben, Boštjan Jazbec, Gert-Jan Koopman, Alexander Lehmann, TJ Lim, Brendan McDonagh, Reza Moghadam, Ajay Rawal, Emanuele Rosetti Zannoni, Dirk Schoenmaker, Carola Schuler, Julien Wallen, Thomas Wieser and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 3, 2017
Read article Download PDF More on this topic

Policy Contribution

Capture

Making the best of the European single market

Now more than ever, the EU needs to address concerns about the significant decline in productivity growth and the increasing perception of unfairness. Completing the single market would unlock the EU's growth potential. At the same time, the EU should empower member states to fight inequality by helping them better distribute the gains arising from economic integration.

By: Vincent Aussilloux, Agnès Bénassy-Quéré, Clemens Fuest and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: February 2, 2017
Read about event More on this topic

Past Event

Past Event

Europe’s growth champion: will Poland’s success continue?

An event at which Marcin Piatkowski will present the key messages from a book on Poland that he is writing for Oxford University Press.

Speakers: Dan Bucşa, Maria Demertzis, Alexander Lehmann, Marcin Piatkowski and Paweł Samecki Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 31, 2017
Load more posts