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24 May 2012

ECB/Asmussen: A European Central Bank perspective on key issues of the crisis


Mr Asmussen stressed that a growth package should have three components: reforms in product and services markets, reforms in labour markets, and funding of growth initiatives.

In Mr Asmussen's view, the European Council delivered two strong messages. First, it confirmed the euro area’s commitment to a long-term vision. The final destination is clear: a deepened economic union which manifests the partial political union our currency de facto already represents. The most important outcome of last night is that leaders showed their commitment to move the economic and monetary union to a new stage. Second, all EU leaders agree that growth-enhancing measures and efforts to achieve sustainable public finances need to go hand in hand.

1. “Policy-makers are obsessed with austerity. They ignore the need for growth in Europe.”

Austerity versus growth. This debate is wrong. Policy-makers are often accused of being obsessed with fiscal austerity and ignoring the need for growth in Europe. Fiscal consolidation is not an end in itself. Rather, it is a pre-condition for achieving sustainable growth. Fiscal consolidation creates the confidence that investors and consumers need. Ultimately, it supports both economic growth and employment. The only alternative would be to fight debt with more debt. This is no solution. But while fiscal consolidation is a necessary pre-condition for sustainable growth, it is not sufficient. So the debate is not about austerity versus growth, instead it is about austerity and growth. EU needs both.

From Mr Asmussen perspective, a growth package should have three components:

  • reforms in product and services markets
  • reforms in labour markets
  • funding of growth initiatives.

2. “The ECB is moving on very thin ice. Its actions increase inflationary risks in the euro area.”

A number of questions have been raised about these operations. The most important concern is that the LTROs increase inflationary pressures. A large injection of central bank liquidity could, in principle, give rise to inflationary risks. Inflationary risks would increase if a massive rise in firms’ demand for credit was met by an equally massive increase in banks’ capacity and willingness to supply credit. These conditions are clearly not met at the moment.

As with all other measures the ECB has taken, the LTROs are fully in line with ECB’s guiding principle: the maintenance of price stability. ECB constantly monitors the developments of credit and money in the euro area. If inflationary risks were to emerge, ECB would take the necessary action to prevent these risks from materialising and withdraw any excess liquidity.

3. “The current crisis management is all about quick fixes. There is no medium- or long-term strategy.”

To many observers, the crisis management looks very much like “muddling through”. This is only half true. In addition to the day-to-day crisis fighting, a number of far-reaching decisions have been taken at the European level, some under the Polish Presidency last year. These decisions are more than just quick fixes. They should help to improve the functioning of the Monetary Union in the future.

Strong firewalls have been created. In July 2012, the European Financial Stability Facility will be replaced by a permanent safety net, the European Stability Mechanism (ESM). The ESM will have a robust capital structure and flexible crisis intervention tools at hand to mitigate contagion risks in the euro area. Overall, the euro area is mobilising a firewall of about €800 billion, or more than $1 trillion. The EU’s fiscal regime, the Stability and Growth Pact, has been strengthened. 25 EU Member States have signed the fiscal compact, which commits countries to enshrining important fiscal rules in binding national legislation. A real innovation is the Macro-economic Imbalances Procedure. It will help to detect and correct economic imbalances, for instance in house price developments. More legislative acts are under way to further increase the surveillance of national economic policies.

There is one broad area, however, where a good strategy is still missing. This is the area of financial markets. Mr Asmussen mentioned one concern which needs to be addressed: the negative feedback loops between banks and national governments. The recapitalisation of a troubled bank by its government may lead to a deterioration of the government’s fiscal position. The deteriorating fiscal position in turn further weakens banks’ balance sheets, through their holdings of sovereign bonds.This feedback loop has to be stopped. There is need to move closer to a financial markets’ union. A European bank resolution authority and a European deposit insurance scheme are two elements that could be used to address the nexus between sovereigns and banks.

Full speech



© BIS - Bank for International Settlements


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