Emerging Markets: What do you see as the main challenges for the ECB in the coming year?
Jürgen Stark: The main challenge for the ECB is to tailor the exit from its accommodative monetary policy stance in an environment of prevailing uncertainty.
As regards the provision of liquidity, we are in the process of phasing out some of our special refinancing facilities, to the extent that financial market conditions normalise. In general, in the Eurosystem, we benefit from the fact that our non-standard measures, namely, the enhanced credit support and the Securities Markets Programme are, by construction, of a temporary nature. Nevertheless, the process will need to be gradual, given the uncertainty surrounding the evolution of economic and financial market conditions. We have to remain prepared for unforeseen challenges along the road.
We are fully aware that maintaining an accommodative monetary policy stance for too long can pose serious risks to our economy and, ultimately, to price stability over the medium term. We must be sure that the actions taken to tackle the crisis do not sow the seeds of new imbalances or excesses. Thus, the ECBs key interest rates and overall provision of liquidity will be adjusted timely and appropriately.
Our unambiguous guiding post for the timing and sequencing of exit from monetary accommodation is the outlook for medium-term risks to price stability.
With the securities market program, the ECB has gone into new territory. Are you satisfied with its impact? How long do you see it remaining in place? Has sterilization worked?
The ECB launched the SMP in the context of severe market dislocation in some euro area bond market segments. On 7 May 2010 trading in these markets had come to a halt and bond prices had dropped dramatically on the back of this very limited trading activity. These developments were assessed as threatening to disturb the transmission mechanism of monetary policy, which relies on the smooth functioning of some core financial markets. Our interventions have contributed to stabilising these market segments, which is a prerequisite for the return of market activity.
Nevertheless, it is clear that the recovery of these markets is still fragile. We are monitoring closely the developments. . As regards the sterilisation, I would like to point out that SMP related liquidity-absorbing operations are successful. The ECB is reabsorbing in full, every week, the additional liquidity injected through SMP purchases. These purchases are not quantitative easing.
Are we any closer to fiscal unity than before? Is the European Financial Stability Facility a step in the right direction?
The comprehensive package of measures taken by the Ecofin Council and the Member States on 10 May 2010 aim to preserve financial stability in Europe. This package includes the decision by the euro area Member States to create the European Financial Stability Facility. These measures were exceptional. Loans are not transfers, and the activation of financial support is subject to strong conditionality, in the context of a joint EU/IMF programme. We are not closer to fiscal unity than before. This would require a fully fledged European federation. But what we need is a quantum leap in fiscal and macroeconomic surveillance.
The councils decision to keep fixed-rate full allotment for as long as necessary shows banks are still coming to the ECB for much of their funding needs. Are they doing enough to lend this money on? How else can you restore confidence?
The fixed-rate tender with full allotment procedure essentially serves to reduce banks funding liquidity risk, as they can be certain to obtain the quantity of central bank liquidity they need at any time at a fixed price. This policy, which is part of our enhanced credit support measures, is especially needed in times like these when liquidity risk premia in markets are very high because of an overall unusually high level of uncertainty that prevails among market participants. The reduction in these premia since October 2008, when we introduced the fixed-rate tender with full allotment in all refinancing operations, shows that the measure was very effective. Over the last months we have seen an ongoing improvement in the money markets with increasing EONIA trading volumes. These are signs of a gradual normalisation.
Youve done an "exceptionally good" job of anchoring inflation expectations since the single currency was introduced. How will you continue to be able to do this in the current economic landscape, which has changed so much after Lehman and the Greek crisis? Are there any areas that merit closer surveillance?
The firm anchoring of inflation expectations is a clear signal of the degree of confidence in the ECB and in the euro as a stable and credible currency. As you may know, our primary objective is to maintain price stability over the medium term. Our mandate is enshrined in the EC-Treaty, and clearly has not changed during the crisis. Since the introduction of the euro, price developments have been fully in line with our aim of maintaining inflation rates below, but close to 2% over the medium term. The credibility earned during these years contributes to the strong anchoring of inflation expectations in the euro area, including in crisis times. Credibility is a priceless asset, and I can assure you that looking forward we will continue to pursue our mandate staunchly.
The crisis has shown that price stability is an important but not a sufficient precondition for financial stability. This brings me to two important lessons we should draw from the crisis. First, there is a need for stronger enforcement of the EU fiscal rules. Euro area countries share a common destiny where the actions or inactions of one partner have profound effects on the other members. Therefore euro area governments need to collectively ensure that the budgetary policies of all are in compliance with the Stability and Growth Pact. Second, the problem of significant divergences in competitiveness and intra-euro area macroeconomic imbalances needs to be urgently addressed. This is an issue for enhanced euro area economic governance rather than an issue for international institutions and global surveillance. The euro area needs a new surveillance framework for competitiveness developments, including a corrective arm to remedy harmful macroeconomic imbalances.
Finance ministers are talking about actually imposing fines for euro members who break the stability and growth pact, do you welcome this?
The Stability and Growth Pact constitutes the appropriate framework for fiscal policy surveillance and coordination in the EU. But the unsatisfactory implementation of the rules in the past has not resulted in sound fiscal policies. For this reason it is an urgent necessity to enhance the fiscal rules.. As you know, these issues are discussed in different European fora. The ECB has made its own proposals public.
An important lesson we draw from the past is that the application of the fiscal rules, including procedures and sanctions, should be de-politicised and quasi-automatic. Otherwise, there is the possibility of considerable discretion in the application of the rules, which can be exploited in an opportunistic manner and lead to a lenient or even absent enforcement. Moreover, sanctions should lose their current character of being an option only at the end the budgetary surveillance process, when agreement is difficult.
Broadening the variety of sanctions including political sanctions, such as losing voting rights and applying graduated sanctions as soon as countries go off track could also help to make the rules more binding. I think we also need an independent body which assesses the fiscal positions of countries and provides policy recommendations to the Commission and the Council.
The latest ECB forecasts were revised upwards and you seem relaxed about the risk of a double dip. How will that affect the timing of the exit strategy?
Indeed, in September ECB staff responsible for the projections, have revised upward their projections for economic growth for 2010 and 2011 compared to the projections of June 2010. This is mainly due to the stronger than expected rebound in economic growth in the second quarter as well as better than expected developments over the summer months. This is good news, also stressed be the fact that the recovery is more broad-based and also driven by higher domestic demand. The more favourable outlook indeed further reduces the risks of a double dip occurring in the euro area, but these risks in our assessment were very small anyway. However, as I mentioned already, uncertainty is still prevailing.
At the same time we see neither inflationary nor deflationary risks over the medium term. Inflation rates should remain moderate overall, but the risks to this outlook are slightly tilted to the upside. As already mentioned, inflation expectations over the medium to longer term continue to be firmly anchored.
The process of the exit from the Eurosystem's non-standard measures, or their phasing out as we like to call it, will need to be gradual given the uncertainty surrounding the evolution of economic and financial market conditions. These measures have been enacted during the period of acute financial market tensions to ensure a better transmission of our monetary policy to the economy. However, we made clear from the very beginning that by - construction, - they would be temporary in nature and fully in line with our price stability objective.
The somewhat more favourable economic outlook does not directly affect the conditions for the timing of the phasing-out. They could be of more relevance to our assessment of the monetary policy stance, given that the more favourable outlook has resulted in a slight upward revision in our inflation outlook.