Warwick Economic Summit
University of Warwick
14 February 2009
Ewald Nowotny
Governor of the Oesterreichische Nationalbank (Austrian central bank) www.oenb.at

GDP Forecasts for the Euro Area, the U .K., the U .S.A. and Japan
(annual changes in %)
2.0
1.2
0.9
1.0
0.7
0.4
0.0
2008
2009
2010 2008
2009
0.2
2010 2008
2009
1.7
2010
-1.0
-1.6
-2.0
-1.9
-3.0
-2.8
-4.0
Euro area
Source: European Commission.
www.oenb.at
U.K.
- 2 -
U.S.A.
2008
-0.1
2009 2010
-0.2
-2.4
Japan oenb.info@oenb.at

Forecasts of Inflation for the Euro Area, the U .K., the U .S.A. and Japan
(annual changes in %)
4.0
3.4
3.4
3.3
3.0
2.0
1.0
1.0
1.8
0.0
2008 2009 2010
-1.0
-2.0
Euro area
Source: European Commission.
1.1
2008
0.1
2009 2010
U.K.
0.7
0.4
2008 2009 2010
U.S.A.
www.oenb.at
- 3 -
0.6
2008
2009 2010
-0.5
-1.4
Japan oenb.info@oenb.at

Euro area
EU 27
AT
DE
IE
LV
PL
SK
UK
GDP
(annual change in %)
2009
-1.9
-1.8
-1.2
-2.3
-5.0
-6.9
2.0
2.7
-2.8
2010
0.4
0.5
0.6
0.7
0.0
-2.4
2.4
3.1
0.2
Government Deficit
(in % of GDP)
2009
-4.0
-4.4
-3.0
-2.9
-11.0
-6.3
-3.6
-2.8
-8.8
Source: Interim Forecast of the European Commission, January 2009
2010
-4.4
-4.8
-3.6
-4.2
-13.0
-7.4
-3.5
-3.6
-9.6
Unemployment rate
(in %)
2009
9.3
8.7
5.1
7.7
9.7
10.4
8.4
10.6
8.2
2010
10.2
9.5
6.1
8.1
10.7
11.4
9.6
10.5
8.1
www.oenb.at
- 4 oenb.info@oenb.at

In contrast to the last few years:
No trade-off between short-run developments in inflation and output.
In the current crisis, inflation and output are behaving like after a demand shock. Both are dropping significantly.
Thus, the policy response is straightforward: decrease policy rates. www.oenb.at
- 5 oenb.info@oenb.at

Central Policy Rates in %
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09
U.S.A.
Japan U.K.
Euro area
Source: Thomson Financial.
www.oenb.at
- 6 oenb.info@oenb.at

Policy interest rates have decreased worldwide. However…
slow effect on the real economy
the pass-through to bank lending rates might be hampered because of the financial crisis
a too-swift decrease of policy rates might signal panic
what happens when the zero lower bound is reached
difficulties in the implementation of monetary policy… www.oenb.at
- 7 oenb.info@oenb.at

-
-
-
-
Persisting tensions in global money markets…
Counterparty risks
Liquidity risks
… led to
volatile overnight rates
high term interest rate spreads
declining volumes, signs of rationing
300
250
200
150
100
Stress on Interbank Markets: U nsecured vs. Secured T hree-Month Rates
400 in basis points last value: 09/02/2009
350
Money markets crucial for the implementation of monetary policy derivative markets, interest rates for households and firms
50
0
12/06 06/07
USD
Source: Thomson Financial.
12/07
EUR
06/08 12/08
GBP www.oenb.at
- 8 oenb.info@oenb.at

Key challenge: Distribution of liquidity in the system when interbank lending is impaired
Pre-crisis ECB framework:
Large group of banks admitted to regular tender operations and standing facilities
Broad range of collateral
Weekly and three-month open market operations
 No need for special facilities.
 Alleviate strains in term funding markets by increasing term funding.
www.oenb.at
- 9 oenb.info@oenb.at

Unprecedented level of stress in financial and in particular interbank markets.
Flexible reaction
Full allotment in tender operations
Wider range of eligible collateral
Temporarily significant involvement in intermediation
Alleviate stress in global markets
Stepped-up cooperation between central banks
Unlimited access to US dollars for euro area banks
Overall: Operational framework has passed the test well, has provided a maximum of continuity www.oenb.at
- 10 oenb.info@oenb.at

51 years after the signature of the Treaty of Rome, the euro remains one of the most tangible signs of Europe ’s determination to forge a common future and work together to secure peace and prosperity for our continent.
José Manuel Barroso – June 2008
Moreover, the crisis shows that there is more to the euro than its role as a means of transaction… www.oenb.at
- 11 oenb.info@oenb.at

www.oenb.at
- 12 oenb.info@oenb.at

The euro protects Europe
 EMU shows that in turbulent financial waters, it is better to be on a large, solid and steady ship rather than on a small vessel.
 Businesses were sheltered from exchange rate volatility. No competitive devaluations.
With the single currency, Europe has been able to act swiftly, decisively and coherently
 Would it have been possible to protect separate currencies from the fallout without the euro?
European authorities, parliaments, and central banks reacted immediately
Europe has shown that it is capable of taking decisions
 The crisis has improved popularity of the EU. People are more convinced of the achievements and institutions of EU and EMU. www.oenb.at
- 13 oenb.info@oenb.at

In the short run
 Maintain price stability
 Return to the path of growth and stability in Europe, stimulate employment and create jobs
 Overcome the financial crisis – maintain financial stability
 Redesign regulatory and institutional frameworks
In the medium to long run
 Cope with globalisation
 EU: implement the Stability and Growth Pact firmly and credibly, render economies more productive, innovative, avoid competitive divergences, stimulate scientific and technological progress
 Address ageing population
 Handle euro area enlargement optimally – increase from 11 members in 1999 to 16 members in 2009
 Strengthen the euro area’s international role and the euro’s image www.oenb.at
- 14 oenb.info@oenb.at