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Shadow ECB

Council Urges ECB Not to Prepare for EMU Breakup

VonNorbert Häring

At the meeting of the Shadow ECB Council on 1 March 2012 a large majority continued to recommend a cut of the ECB’s main refinancing rate. While some members supported the idea of examining ways to collateralize Target2-balances of central banks with the ECB, a majority warned that taking such precautions could be interpreted as preparing for a break-up of monetary union and thus would send a strong signal and could contribute to bringing about the event.     

Downward trend in growth forecasts peters out

Members did not lower their forecasts for euro area real GDP in 2012 any further. At minus 0.4% it compares to the ECB staff’s December projection of plus 0.3% and the Shadow ECB Council’s own December forecast of 0.1%. For 2013 members now predict a growth rate of 0.9% on average, two tenths less than a month ago and significantly below the December ECB projection. Meanwhile, in the view of the Shadow Council, euro area HICP inflation is expected to decline to 1.9% in 2012 and to 1.7% in 2013. The ECB projections entails a higher a rate of 2.0% in 2012 and a lower rate of 1.5% in 2013.


Shadow Council macroeconomic forecasts

(Forecast means in %, previous forecasts in brackets)

20121.9 (1.8)-0,4  -(0.4)
20131.7 (1.7)0.9  (1.1)


Contributors: M. Annunziata, M. Balmaseda; E. Bartsch; J. Cailloux; J. Callow; E. Chaney, M. Diron, G. Horn; J. Krämer, E. Nielsen, J.-M. Six


Large majority for a rate cut

There continued to be a two-third majority in favor of a decrease in the ECB’s refinancing rate. The main argument in favor was the prospect of negative growth in the euro area. Most members would expect a rate cut to weaken the external value of the euro, which would stimulate external demand and make domestic producers more competitive vis-à-vis importers.  It was also argued by some that lower rates would contribute to strengthening the banking sector by helping banks achieve higher earnings.


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.


Widespread support for LTROs and opposition to prepare for EMU breakup


The December 3-year Long Term Refinancing Operation was widely considered to have had very powerful results in stabilizing the banking sector, averting a full-blown credit crunch, bringing down funding costs of governments and risk-aversion in general. Most members regarded this policy tool very favourably and supported the extension of even more long term credit at the second 3-year Long Term Refinancing Operation at the end of February. There was a consensus that it was time to pause and asses the impact of the two operations without committing to either do more or to end these operations.  


There was widespread concern that the relaxation of collateral rules might be threatening the integrity of the balance sheets of central banks. Some members also cautioned that the use of the 3-year-funds to buy government bonds was increasing the exposure of national banking systems to their respective governments. Others considered this “carry trade” as welcome, as it was helping to defuse the sovereign bond crisis.


In the discussion, a majority strongly opposed any consideration of requiring central banks with negative target-2-balances to provide collateral. The majority warned that this would send a strong signal that central banks did not believe in the irrevocability of monetary union any more and could therefore be interpreted as preparing for its break-up. A minority argued that a departure of Greece could not be considered a remote possibility any more and that the public knew that already. These members argued that it would be reasonable to transfer collateral that central banks with negative Target-balances receive in the process of money creation to central banks with positive balances. It was noted in this respect, that a positive Target-2-balance of close to €500bn was the largest item by far on the balance sheet of the Bundesbank.


Most members considered a tightening of collateral rules as soon as possible the first-best option to reign in Target-2-balances. Some argued that lowering the key interest rate and switching back to variable-rate tenders could also contribute, while respecting banks’ need for opportunities to strengthen their balance sheets. A minority concurred that the ECB’s haircuts for risky collateral were so high, that it was not clear that risk levels on central bank balance sheets had really increased significantly.

Members’ individual votes:

MemberAffiliationRate recommendationBias
José AlzolaThe Observatory Groupcut 0.25% 
Marco AnnunziataGeneral Electriccut 0.25% 
Manuel BalmasedaCEMEXcut 0.5% 
Elga BartschMorgan Stanleycut 0.25% 
Andrew BosomworthPimcocut 0.5% 
Jacques CaillouxRBScut 0.5% 
Julian CallowBarclays Capitalcut 0.5% 
Eric ChaneyAxacut 0.25% 
Marie DironOxford Economicscut 0.5% 
Janet HenryHSBCcut 0.25% 
Gustav HornIMK, Düsseldorfunchangeddown
Jörg KrämerCommerzbankunchanged 
Erik NielsenUnicreditunchanged 
Jean-Michel SixStandard & Poor's cut 0.25% 
Richard WernerUniversity Southamptonunchanged 


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