The ECB and Its Watchers XVI
The sixteenth edition of the conference "The ECB and Its Watchers" on March 11, 2015 set new records with more than 450 participants. As Mario Draghi, President of the European Central Bank, said in his speech, euro area developments are "pointing in the right direction". The ECB buying government bonds and other debt "may be shielding other euro area countries from contagion" from Greece, Draghi told the conference organized by the Center for Financial Studies (CFS) and the Institute for Monetary and Financial Stability (IMFS) at Goethe University Frankfurt. Two days earlier the ECB had started its quantitative easing (QE) program, which will induce monthly purchases of up to 60 billion euros of eurozone government debt, along with private sector assets and the debt of eurozone institutions.
President's Address: Mario Draghi
After welcome remarks by organizer Günter Beck, Research Fellow of both the CFS and the IMFS, and the President's Address, the first session chaired by CFS President Otmar Issing questioned the effectiveness of non-standard monetary policy measures. ECB Board Member Peter Praet pointed out in his speech that thanks to policy measures taken by the ECB since the summer the nominal cost of bank borrowing for euro area companies went down sharply. Jordi Gali of the Barcelona-based research institute CREI considered the non-standard measures positive but likely insufficient to jumpstart growth of the euro area economy. According to Volker Wieland, Director of the IMFS and longtime organizer of the conference series, the impact of earlier measures by the ECB were already sufficient given the outlook. "The ECB needs to take into account the reactions of governments to ECB actions in estimating the impact of the actions on growth and inflation," Wieland argued.
With the ECB taking up the responsibility of banking supervision last November, in the second session Bank of Finland Governor Erkki Liikanen, Stephen Cecchetti of Brandeis University and Casper de Vries, member of the Dutch Council of Economic Advisors, discussed the challenges resulting from the ECB’s double role. Against this background, Liikanen acknowledged risks like insufficient macroprudential tools. In his view, however, the new regulatory framework has contributed to growth in financial intermediation. De Vries pointed out that "empirical research shows that the main effect of QE is through the exchange rate". As proposed by de Vries, an "official intervention without sterilization would have been perfectly in line with the European Treaties". Cecchetti, former chief economist of the Bank for International Settlements (BIS), regarded time-varying policies unlikely to be effective.
With a panel bringing in perspectives from Asia, South America and Europe, the international challenges for monetary policy were in the center of the conference’s third session. While Ewald Nowotny, Governor of the Austrian central bank, declined to speak from a currency war with the ECB pushing the balance sheet back to early 2012 levels, former Brazilian central banker Arminio Fraga Neto stated that forward guidance and QE drove longer term interest rates down considering a "currency war as the next step". Comparing the situation in the United States with Japan 15 years ago, Nomura chief economist Richard Koo warned that in a situation like that "the government has to help until the private sector balance sheet is repaired". Referring to Japan, "the exit of QE is extremely difficult", he went on. "Once QE is removed in the United States, the budget deficit will not be 500 billion dollars but a trillion", Koo said. Andre Sapir, on the other hand, showed himself rater optimistic concerning QE in the euro area. "QE is going to have a significant impact on the southern countries of the euro area countries", he was convinced.