Shadow ECB Council sees the integrity of the currency union still endangered

At the meeting of the Shadow ECB Council on 26 February 2015, it became clear that most members do not expect the agreement of the Eurogroup regarding Greece to lead to a sustained reduction of political tension and associated worries about the integrity of the euro area.
Forecasts for inflation in the euro area declined strongly below the ECB projection from December. Quelle: Reuters

Forecasts for inflation in the euro area declined strongly below the ECB projection from December.

(Foto: Reuters)

The average forecast for inflation in 2015 was slashed to zero, yielding an unusually large discrepancy with the forecast of the ECB staff from December.

Compared to three months ago, the average forecasts for inflation this year declined very strongly by 0.9 percentage points to 0.0 percent. This is an unusually large 0.7 percentage points below the ECB projection from December, implying that the new ECB projections, which are due to be published on 5 March might need to be lowered very significantly. The Shadow Council’s mean forecast for GDP-growth in 2015 increased by 0.2 points to 1.2 percent, for 2016 it stayed unchanged at 1.5 percent.  

Several members noted that the upwardly revised consensus forecast of the Shadow Council for growth might still be too low, as low oil prices, a lower value of the euro and a positive impulse from improving credit conditions would likely have a powerful positive effect on economic activity.

Shadow Council macroeconomic forecasts (ECB’s December projections in brackets)
20140.40.9 (0.8)
20150.0 (0.7)1.2 (1.0)
20161.1 (1.3)1.5 (1.5)
Contributors: M. Annunziata, E. Bartsch; A. Bosomworth; S. Broyer; J. Cailloux; J. Callow;, J. Henry, J. Krämer, F. Lindner, E. Nielsen,

Agreement of Eurogroup with Greece will only give a brief respite in tense negotiations – integrity of euro area not saved for good7

Members agreed that the recent agreement in the Eurogroup on the extension of the credit support programme for Greece would not provide a lasting easing of the tensions which – in the judgement of many members – are threatening the integrity of the euro area. Several members stressed that the liquidity situation of the Greek government appeared precarious, such that potentially adversarial negotiations about ways to overcome these difficulties would have to continue without much respite. At the same time, negotiations on how to proceed after the four month extension might soon result in new tensions. In this context it was also noted that upcoming elections in Portugal and Spain might lead to fundamental challenges of the current anti-crisis strategy in these countries also. Italy was additionally mentioned as being at risk from a shift in sentiment away from the current orthodoxy.

However, one member voiced the opinion that even an exit of Greece from the currency union would not yield catastrophic results, since private sector exposure to Greek government bonds has become quite small. Contrary to this view, the consensus on the Shadow Council was that contagion would happen through exposure to public bonds of other crisis countries. The bond-buying programme starting this month in the context of quantitative easing was not considered very useful for the purpose of preventing such contagion, while the OMT-programme would not be able to be deployed fast enough.

Limited risk-sharing in QE-programme criticised

While the details of quantitative easing programme of the ECB were not discussed extensively at this meeting, several members remarked very critically on the decision to leave most of the risk with the national central banks. This was considered by them as leading to a fragmentation of capital markets and exacerbating the risk of a disintegration of the currency area. This opinion was not universally shared, though.

ECB should get involved in politics as little as possible

There was consensus that the ECB should avoid as far as possible to get involved into political decisions, but rather stick to the usual rules and procedures as much as possible. However, members did note that this was a rather difficult task, as the central bank had to take a decision on whether to reinstate the waiver for Greece regarding collateral eligibility and, even more importantly, had the power as a bank regulator, to decide how much Greek government paper Greek banks would be allowed to hold or buy, meaning it would directly affect the liquidity issues of the Greek government.

No need to act on interest rates

Members largely kept their rate recommendations unchanged from three months ago, with a very large majority in favour of unchanged rates.

Members’ individual votes on main refinancing rate (currently 0.05%)
MemberAffiliationRate recommendation
José AlzolaThe Observatory Groupunchanged
Marco AnnunziataGeneral Electricunchanged
Elga BartschMorgan Stanleyunchanged
Andrew BosomworthPimcounchanged
Sylvain BroyerNatixisunchanged
Willem BuiterCitigroupcut to -0.25
Jacques CaillouxNomuraunchanged
Julian CallowCatalyst Economicsunchanged
Eric ChaneyAxaunchanged
Janet HenryHSBCunchanged
Merijn KnibbeWageningen Universityunchanged
Fabian LindnerIMKunchanged
Jörg KrämerCommerzbankhike to 0,30%
Erik NielsenUnicreditunchanged
Richard WernerUniversity Southamptonhike to 0,30%

Frankfurt, 27 February, 2014

Norbert Häring (Non-voting Chairman)

Background information
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