– The Eurosystem Challenges and Perspectives Ewald Nowotny

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The Eurosystem –

Challenges and Perspectives

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

Forecasts for EU and Euro Area Countries

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

Challenges for Monetary Policy I

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

Challenges for Monetary Policy II

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

Challenges for Monetary Policy Implementation

-

-

-

-

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

ECB Liquidity Management: Stability within the Turmoil

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

After the Collapse of Lehman Brothers

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

The Euro Has Indeed Become a Global Player

www.oenb.at

- 12 oenb.info@oenb.at

The Benefits of the Euro in the Financial Crisis

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

Future Challenges for EMU and the Euro

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

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