The ECB and Its Watchers XX

March 27, 2019

Hilton Frankfurt City Centre
Hochstrasse 4
60313 Frankfurt am Main

At the 20th anniversary of the conference "The ECB and Its Watchers", ECB President Mario Draghi conveyed the message that the European Central Bank (ECB) was ready to soften the impact of negative interest rates in case they harmed the transmission of monetary policy. As he said in his opening address, the ECB was monitoring how banks could maintain healthy earning conditions while net interest margins were compressed. However, "low bank profitability is not an inevitable consequence of negative interest rates", Draghi added. Almost five years ago the ECB introduced negative interest rates. In contrast to other central banks, such as the Bank of Japan or the Swiss National Bank, the ECB has not adopted mitigating measures along with negative interest rates so far. With regard to the recently announced new series of targeted longer-term refinancing operations (TLTROs), Draghi said that the calibration of the remaining parameters would reflect the evolving macroeconomic conditions. In case the medium-term outlook should continue to deteriorate significantly, the ECB would adopt all monetary policy actions necessary. "We are not short of instruments to deliver on our mandate", Draghi concluded.

At Draghi's fifth and final visit to "The ECB and Its Watchers" conference during his term of office, organizer Volker Wieland said goodbye to the ECB President with a reproduction of an Aachen penny of Charlemagne as a gift. The empire of Charlemagne was the largest European currency area before the euro existed.

Opening the first conference session, ECB chief economist Peter Praet underlined that the ECB stood "ready to adjust all of our instruments, as appropriate, to ensure sustained inflation convergence towards levels below, but close to, 2% over the medium term". Due to uncertainties related to geopolitical factors and the threat of protectionism, "the process of inflation convergence takes time", Praet said. Since his mandate was coming to an end, he received as a gift an "ECB Watchers' hot seat". "You always seemed to feel very comfortable in the hot seat at our conference so we wanted to make sure you don't miss it", Wieland said handing over the present.

Regarding the size of the ECB's balance sheet, Ricardo Reis of the London School of Economics, argued that normalization meant "the balance sheet should be bigger than in 2007 before the crisis but smaller than now". Charles I. Plosser of the Hoover Institution at Stanford University agreed that institutions change over time, which could "result in a change of the framework of those institutions". Moreover, "there is no one size fits all for central banks", Plosser added.

In the session on possible international spillovers, ECB Vice-President Luis de Guindos found that US monetary policy was a driver of a global financial cycle but "ECB monetary policy actions are, by and large, able to shield the euro area economy from spillovers from US monetary policy". Laurence Boone, OECD chief economist, expressed her concern about the lack of growth and inflation. Instead of relying too much on monetary policy, "it's time for the euro area to consider a coordinated fiscal stimulus and raise trend growth with structural reforms", Boone demanded. Jacob A. Frenkel, former Governor of the Bank of Israel and current Chairman of JPMorgan Chase International, explained that in a low-interest environment the focus was shifted to other factors besides monetary policy measures, such as forward guidance. "The guidance is a dictionary that brings together markets and policy-makers", Frenkel said.

Looking at central bank independence, which had been recently questioned, as the topic of the third session ECB Board member Yves Mersch emphasized the principles of necessity, proportionality and probity on the part of the central bank. In his view, "the best protection against unjustified attacks on the independence of monetary policy is a narrower mandate combined with a high degree of transparency and the strict interpretation of legal limits". Paul Tucker, Senior Fellow at the Center for European Studies at Harvard and former Deputy Governor of the Bank of England, agreed with Mersch on the need for a central bank's independence. "The last person who should hold monetary policy power is the elected person", Tucker said. He warned that a "credible commitment problem can infect the legislative process itself". John H. Cochrane, Senior Fellow at the Hoover Institution, pointed out that a central bank’s independence comes from the way how central banks are behaving. According to Cochrane, known as the "grumpy economist" for his blog, argued that independence must come with limited powers and must follow rules, norms and traditions. But in order to be independent, a central bank has to be perceived to be competent at its tasks.

Booklet: 20 Years of "The ECB and Its Watchers" (PDF)

Videos of the conference: