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Shadow ECB

Council is sceptical on size and structure of the ECB’s package

VonNorbert Häring

At the meeting of the Shadow ECB Council on 26 September, 2014, there was a strong consensus that strong disinflation and weak economic prospects warranted ECB action


Frankfurt/MAt the same time, there was near consensus that the package of measures announced by the central bank in early September would not be sufficient and there was disagreement on their appropriateness. Many members suggested large scale purchases of securities, notably public bonds, and several suggested purchases of foreign assets or various forms of helicopter money. One of the 15 members argued for a further significant rate cut, three members argued for rate increases. 

Inflation and growth forecasts lowered further

All members who provide forecasts expect sub-target inflation to continue for the foreseeable future. Compared to three months ago, the average forecast for inflation this year declined further from 0.8 to 0.6 per cent and for 2105 from 1.1 to 1.0 percent. The Shadow Council’s mean forecast for GDP-growth also declined from 1.0 per cent to 0,8 per cent this year and from 1.4 per cent to 1.1. per cent for 2015. Regarding inflation, these average forecasts are roughly in line with the latest ECB projections published in early September, while the growth forecast of the Shadow Council for 2015 is half a percentage point below the ECB’s projection, a difference that is unusually large.

Shadow Council macroeconomic forecasts

(Forecast means in %, previous forecasts in brackets)

20140.6 (0.8)0.8 (1.0)
20151.0 (1.1)1.1 (1.4)
Contributors: M. Annunziata, E. Bartsch; A. Bosomworth; S. Broyer; J. Cailloux; J. Callow;, J. Henry, J. Krämer, F. Lindner, E. Nielsen.


Was the latest ECB package needed?

There was near unanimity on the Shadow Council that recent developments in inflation and the economic outlook warranted a new package of measures by the ECB, even if not all of the measures taken in June have had a chance to prove themselves, yet.

It was noted that the ECB risked losing its credibility as inflation was generally expected – including by the ECB – to remain below the ECB’s target rate of close to two per cent for several more years. It was further noted that a large degree of underutilization of economic resources showed no sign of shrinking and that economic indicators had been unfavourable recently. Thus, downward pressure on inflation would continue.

Are the ECB’s measures appropriate and sufficient?

Most members of the Shadow Council expressed scepticism regarding the size of the money injection and the efficacy of the measures taken. While they expect banks to take out more of the targeted long term loans (TLTRO) in the December instalment than they did in the September instalment (86 bn Euro), most members considered a much larger extension of the ECB’s balance sheet necessary, considering it had shrunk from a maximum of three trillion euros to about two trillion.

The purchases of asset backed securities (ABS) that the ECB has announced as part of the latest package have been criticised by the public, politicians and even central bankers, notably in Germany. It has been argued that it is inappropriate for the CB to take risky assets on its balance sheet to help banks. On the Shadow Council, this critical view is not widely shared. Several members expressly stated that relieving banks’ balance sheets of risky assets was the best thing the ECB could do to get banks to issue more credit to the economy, though one of these members argued that in exchange the ECB should demand the right to influence the credit policy of the supported banks. Other members expressed confidence in the risk management capacities of the central bank.

Are the ECB’s policy rates appropriate?

Most members consider the ECB’s policy rates to be roughly at their lowest feasible level now at minus 0,2 per cent, 0,05 per cent and 0,30 per cent, respectively, and thus largely not a policy tool any more for the foreseeable future. One member, however, argued that these rates could and should be lowered significantly. On the other side, three members argued in favour of higher rates, because they doubt the efficacy of very low rates in stimulating bank credit and are concerned about negative effects, notably an unsustainable pumping up of asset prices.

Which better or additional options does the ECB have?

Many members of the council expect that the ECB will eventually have to resort to large scale asset purchases, including public bonds in order to inject enough money to make up for the shrinking bank credit.

Three members suggested various forms of so called helicopter money, i.e. new money created directly by the ECB and not through commercial banks and distributed to households, companies or the government.

Many members considered purchases of foreign assets desirable, as this would lead to a lower euro exchange rate, but several of them admitted that this was not politically feasible due to likely resistance of the US treasury.

A number of members are generally sceptical regarding the power of the ECB to stimulate the economy at the current stage. They argued that there should be a European funded expenditure programme, notably one to finance infrastructure projects.

Supply side reforms vs. stimulation of demand

There was a discussion about the correct diagnosis and thus remedies for the current problems of the euro area. One member, expressing the views of a majority of the Shadow Council, argued that supply side reforms to enhance the growth potential were an important or even the most important issue to get out of the current problems. Another member invoked the consensus that there was a shortfall of demand and underutilization of resources, notably high unemployment, in the euro area. Supply side reforms to increase the efficiency of resource usage could only increase downward pressure on prices, wages and resource usage in such a situation, this member argued, expressing the opinion of a minority of the council.

Members’ individual votes on main refinancing rate (currently 0.05%):
MemberAffiliationRate recommendation
José AlzolaThe Observatory Groupunchanged
Marco AnnunziataGeneral Electricunchanged
Elga BartschMorgan Stanleyunchanged
Andrew BosomworthPimcohike to 0,25%
Sylvain BroyerNatixisunchanged
Willem BuiterCitigroupcut to -0.25
Jacques CaillouxNomuraunchanged
Julian CallowCatalyst Economicsunchanged
Eric ChaneyAxaunchanged
Janet HenryHSBCunchanged
Merijn KnibbeWageningen Universityunchanged
Fabian LindnerIMKunchanged
Jörg KrämerCommerzbankhike to 0,25%
Erik NielsenUnicreditunchanged
Richard WernerUniversity Southamptonhike to 0,5%

Frankfurt, 29 September, 2014,

Norbert Häring (Non-voting Chairman)

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