At the meeting of the Shadow ECB Council on 26 April 2012 a large majority recommended a cut of the ECB’s main refinancing rate to compensate for the negative growth effects of fiscal austerity.
Members of the ECB Shadow Council members see the southern periphery in an austerity trap: strict austerity depresses growth and prevents from reaching fiscal consolidation goals.
Most members recommend more flexible and moderate fiscal targets for crisis countries to make sure that these countries do not get into a downward spiral of austerity, shrinking economies and the need for more austerity to achieve budget targets. For the euro area on average, members continue to expect negative growth this year, low growth next year and a return to inflation below 2% next year.
Shadow Council macroeconomic forecasts.
(Forecast means in %, previous forecasts in brackets)
|2012||2.2 (2.2)||-0,3 -(0.3)|
|2013||1.7 (1.8)||0.8 (0.9)|
Contributors: M. Annunziata, M. Balmaseda; E. Bartsch; J. Cailloux; J. Callow; E. Chaney, M. Diron, G. Horn; J. Krämer, E. Nielsen, J.-M. Six
Southern periphery seen in an austerity trap or close to it
About a third of Shadow Council members see the southern periphery in an austerity trap, where strict austerity depresses growth so much that this prevents them from reaching their fiscal consolidation goals. Another third does not yet see this to be the case in a strict sense but warns that excessive and overly rigid targets for deficit reduction threaten to become counterproductive and impose too much hardship on populations to be credible and sustainable. Thus a clear majority of the Shadow Council is in favour of more moderate and less rigid consolidation targets, which are adapted if an economy performs worse than expected. The consensus in this group was that institutional reforms which would enhance growth in the longer term were more important and should thus be pursued with more determination than short-term fiscal consolidation.
About a third of members insist that there is no such thing as an austerity trap. These members argued that strict targets are necessary to retain credibility and that the opportunity of the crisis should be used to push through necessary but unpopular cutbacks.
There was near consensus in the Shadow Council that a major problem that needed to be tackeled urgently was the dependence of national banking systems on support by national governments and the negative feedback this caused in crisis countries. Members called on the European Commission and governments to move toward a European banking supervision and to support banks if necessary with European funds instead of national funds.
There was also near consensus on the judgement that markets required a road map toward a new governance structure in the euro area to regain trust. Most members support suggestions to enhance the role of the European Investment Bank in financing growth enhancing investments in crisis countries and to bring structural funds to better use in this respect.
ECB should cut rates to counterbalance effects of austerity
There continued to be a more than two-third majority in favour of a decrease in the ECB’s refinancing rate in order to counterbalance the negative growth effects of widespread austerity. Many members suggested additional measures like injecting more liquidity and resuming purchases of government bonds by the ECB, particularly those of Spain.
The four members who continued to prefer unchanged rates did so partly because they considered interest rate policy ineffective, partly, because they were against loosening monetary policy any further.
Members’ individual votes:
|José Alzola||The Observatory Group||cut 0.25%|
|Marco Annunziata||General Electric||cut 0.25%|
|Manuel Balmaseda||CEMEX||cut 0.5%|
|Elga Bartsch||Morgan Stanley||cut 0.25%|
|Andrew Bosomworth||Pimco||cut 0.5%|
|Jacques Cailloux||cut 0.5%|
|Julian Callow||Barclays Capital||cut 0.5%|
|Eric Chaney||Axa||cut 0.25%|
|Marie Diron||Oxford Economics||cut 0.5%|
|Janet Henry||HSBC||cut 0.25%|
|Gustav Horn||IMK, Düsseldorf||unchanged||down|
|Jean-Michel Six||Standard & Poor's||cut 0.25%|
|Richard Werner||University Southampton||unchanged|
Frankfurt, 27 April 2012
Non-voting Chair of the Shadow ECB Council
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