ECB to be ‘pillar of stability’ in risky year: Policy maker
Monday 28/November/2016 12:47 PM
By: Times News Service
Brussels: The European Central Bank (ECB) is readying itself to again underpin the euro area’s cohesion if needed, according to Governing Council member Yannis Stournaras.
As policy makers prepare to debate the future of their asset-purchase programme on December 8, they’re faced with an outlook that is increasingly foggy. While euro-area inflation is rising and the recovery continuing, officials are also aware that a series of national votes in the next 12 months could change the political landscape and shock the economy.
“Independent central banks will have a much bigger role to play if developments aren’t so benign in the political sphere,” Stournaras said in an interview on Friday. “If there’s more volatility, more uncertainty, more protectionism, we want to be an even stronger pillar of stability.”
The comments by the governor of the Greek central bank, at the institution’s headquarters in Athens, echo remarks by other policy makers in recent weeks. ECB President Mario Draghi said on Nov. 18 that “we cannot be sanguine” over the economic outlook. Vice President Vitor Constancio, flagging an increased risk of a market correction from political uncertainty, said last week that “the ECB will continue to exert its stabilising role.”
Stournaras, 59, speaks from experience. He was at the heart of events in 2015 when Greek banks were shut amid a government funding crisis that led to capital controls and almost forced the country out of the currency bloc. His central bank, with the backing of the ECB, kept lenders alive with Emergency Liquidity Assistance while euro-area politicians squabbled over a national bailout.
He also had run-ins with the government, led by Syriza, the populist party that sparked the crisis by rejecting the terms of the nation’s previous bailout and resisting fresh reform proposals. The rise to power of Syriza and its leader, Prime Minister Alexis Tsipras, offered a foretaste of the risks for Europe, with Italy facing a Dec. 4 referendum on constitutional reform, Austria choosing its president the same day, and France, the Netherlands and Germany all holding elections in 2017.
“My biggest fear is that in a year’s time the political map of Europe might look different,” Stournaras said. “If populism and nationalism are on the rise, this will be risky. At the minimum it’s going to lead to protectionism. And I don’t want to even imagine what the worst-case scenario could be.”
For some officials, that might be an argument for the ECB to keep its stimulus — currently 80 billion euros ($85 billion) a month of debt purchases alongside negative interest rates and long-term loans to banks — going for a longer time.
“I think this kind of monetary policy will continue,” Stournaras said. “Whether it will continue at the same pace for a specific period or at a lesser pace for a longer period has to be decided. I suspect there will be a number of options on the table when we meet.”
Draghi and his colleagues have repeatedly and urgently called for economic reforms to ensure the euro-area recovery can withstand external shocks. Few countries have obliged, and now rising populism is unlikely to encourage governments to step up their game. That leaves the ECB in a role its officials have always said they don’t like: the only game in town.
“As they do all the time, the Governing Council will continue to stress that it’s up to governments to act and that they should do more, but beyond that there’s a line they will not cross,” said Frederik Ducrozet, an economist at Pictet Wealth Management in Geneva. “They cannot be proactive.”
So far, the market surprises have been largely to the upside. Donald Trump’s victory in the U.S. presidential election has boosted global yields on speculation he’ll increase public spending. That has eased scarcity concerns for the ECB’s bond-buying plan and reduced pressure to tweak the program’s parameters. Some Governing Council members even want to postpone a full decision on QE until the next meeting in January.
The euro-area recovery has also proved resilient to both Trump’s win and the UK’s vote to leave the European Union. In September, the ECB predicted economic growth of 1.6 per cent in 2017, about the same pace as this year, and saw inflation nearing its goal of just under 2 per cent by late 2018 or early 2019. Fresh projections will be published on Dec. 8.
That might be a sign that the Governing Council could at least discuss when it can wind down its bond-buying. Yet Stournaras said in the interview even the word “tapering” must be avoided.
“It is a dangerous word right now, because it might create a shock in a period where there could be already plenty of other shocks,” he said. “We’re not there at all. As inflation is set to rise in the coming months, we might find ourselves there perhaps a year from now. But we definitely don’t want it to start having an impact now.”