In preparation to their monthly telefone conference members of the Shadow ECB council debate the ECB's options with regard to Greece's troubled public finances. Latest comment by: Thomas Mayer
The Greek fiscal crisis is the first significant test of political cohesion inside the euro area. The fact that the ECB slammed the door to the Greeks might have contributed to a further loss of confidence from investors who were looking for some soothing words from the Bank. While the ECB's statement came also as a surprise to me, on second thoughts, it appears very clear that the ECB could not have taken a different stance as it would have set such a bad precedent: The ECB has been widely seen as the lender of last resort throughout this crisis and needed to draw a line in the sand not to be perceived as a lender of last resort for the fiscal offenders. The ECB?s response was the right one and will contribute to build long term confidence in the monetary union. It was misinterpreted by the FX market which was looking for a more proactive central bank. The Greek situation is a matter to be dealt with by EMU fiscal authorities and the Treaty allows intergovernmental financial support if the need was to arise. At this stage, it is of utmost importance for the Eurogroup to take the lead and show that, in its new institutionalised role (now that the Lisbon Treaty has been fully ratified), it is capable to provide a framework to solve the Greek fiscal crisis. The monetary union will not break up because of this fiscal crisis but it will require an additional removal of fiscal sovereignty from member countries in the near term, a necessary condition for its long term sustainability.
Jacques is Chief European Economist of Royal Bank of Scotland
I agree with Jacques that the ECB could not say otherwise at this stage: it needed to state that rules will not be changed for the sake of a single member. However, I do not think FX markets have misinterpreted the ECB’s statement: I think FX and bond markets have correctly seen it as confirming a deep and fundamental flaw in the architecture of the euro area: there is no credible and effective mechanism to enforce fiscal discipline, and no agreed mechanism to deal with the ensuing problems. The Greek situation does indeed have to be dealt with by EU policymakers, and personally I think this should push them towards deeper political integration as the only way to enforce fiscal discipline. For the ECB, however, this raises two issues. First, if developments in Greece cause further and higher volatility in bond markets and the financial sector, how should that influence the ECB’s exit strategy? Second, I believe it is high time for the ECB to stop arguing that external imbalances of individual countries within the euro area do not matter. This is a travesty. Such imbalances matter a lot, as we have seen when sovereign spreads widened a year ago, and as we are seeing again today with Greece. I believe the ECB would gain credibility if it recognized the fundamental intrinsic difficulties of the euro area construct, rather than pretending they do not exist. Mr. Trichet tells us Greece matters less to the euro area than California to the US; but as both California and Greece face fiscal problems, it is the euro that loses credibility and value.
Marco is Chief Economist of Unicredt
The ECB must run its policies with a view to the entire Euro-zone, and country specific issues, like in Greece, should not impact policies beyond the relative size of that country. Related, the ECB cannot - and must not - make any special provisions for one or the other member states. If help to a sovereign member were to be needed, it is for the governments - not the ECB - to address. That all said, the ECB should once and for all re-design its collateral eligibility criteria to be less dependent on ratings agencies. It seems inappropriate - and ultimately politically untenable - that it is now de facto in the hands of Moody's alone whether Greek sovereign debt remains eligible beyond this year as collateral in the central bank of that very country. Give me a break!
Erik is Chief European Economist of Goldman Sachs
Yes, we have a European domestic market and yes, we are all interdependent on this market. The consequences of that are not fully understood sometimes. If a country would pledge for fiscal default everybody else in the Euro area is affected. Hence stability of public finance is a public good that needs to be regulated in a Euro area wide manner. The stability and growth pact is an inappropriate attempt to do that. More precise and but also flexible surveillance is needed. What we need is some IMF type institution on a European level that helps countries to overcome these dismal situations by giving assistance and imposing appropriate restrictions at the same time. The ECB however should have been silent at this stage, because in the end we will have to assist Greece in order to overcome any European instability. Furthermore we should diminish the often misguided and biased influence of rating agencies that triggered speculative behavior against the Euro. As a first step their obligatory service should be eliminated from any regulative framework.
Gustav is Scientific Director of IMK Institute
There seems to be unanimity on the fact that the ECB is right to stick to its planned policy to narrow the range of collateral and not to postpone this decision to keep Greek bonds eligible. Doing otherwise would obviously create a damaging precedent that would harm the credibility of the euro and the ECB. It would also create moral hazard since Greece would have less incentive to reduce its deficit. Reducing a deficit from low double digits is not unheard of and should be achievable for Greece. It will be painful but Greece benefits from the stability brought by the euro. The deficit reduction plans need to be credible. The plan presented goes some way towards that by in particular, frontloading much of the reduction. The onus is not only on the Greek government though. It is also on the Greek statistics office and Eurostat which need to ensure that no creative accounting trick is used to present a more favourable fiscal position than is actually the case.
Marie is Senior Economist at Oxford Economics
With my fellow-councillors that the ECB has to stand by its decision to revert the collateral pool back to A- at year-end after interventions by both Vice-President Papademos and ECB President Trichet. In addition to the fundamental argument of potentially creating a dangerous precedent, I also believe that the financial risks to the ECB balance sheet could potentially be larger than many observers acknowledge. This is because the wider collateral pool would need to extend to other governments and importantly to private sector securities unless the ECB was willing to sacrifice its principle to treat public and private sector securities the same (unless their objective characteristics, other than one being issued by a sovereign) warrant it. This would make the decision a much bigger one financially. And once it starts to mop up some of excess liquidity the ECB’s ability to absorb potential losses on its open market operations will be diminished as it will have pay a higher interest in order to take liquidity out of the market again. Given the breadth of the overall collateral that the ECB accepts, where government bonds only account for about 10% of collateral pledged to the ECB, we think that banks should be able to mobilise enough other collateral to obtain funding at the ECB. But for Greek government the support to the indirect QE via the banking system will come to an end.
Elga is Chief European Economist of Morgan Stanley
The way EU institutions and the Greek authorities themselves deal with the country's crisis will in my view set a precedent for other countries and define the future of EMU. A monetary bail-out by the ECB (without adequate Greek economic adjustment) would be likely to turn EMU into a soft currency union with higher inflation in the long-term, and lead to eventual failure. A fiscal bail-out by a group of member states (or EU institutions other than the ECB) would be likely to lead to a union of mutual fiscal exploitation and eventual failure. At the same time, however, given the enormous adjustment task ahead, leaving Greece on its own without any help is also dangerous as it could lead to an uncontrolled default, contagion of other EMU countries, and eventual failure. Hence, what is required is an IMF-type adjustment programme, ideally run by a European body equivalent to the IMF, and contingency plans for an orderly default (for a detailed proposal along these lines see Intereconomics from May/June 2009, pp.138-141).
Thomas ic Chief Economist of Deutsche Bank
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