Konjunktur Shadow ECB Council Supports EU Commission Proposals for Broader and More Stringent Fiscal Surveillance

At the meeting of the Shadow ECB Council on 30 September there was broad support for the recently released proposal by the EU Commission to broaden the approach of fiscal surveillance and to strengthen the process by which fines can be imposed. No member suggested a rate change but four members expressed a bias toward lower rates, up from two a month ago.

Members forecasts for growth and inflation

Growth and inflation forecasts for next year remained unchanged at moderate rates. The average growth forecast of Shadow Council members for this year increased further to 1.6 percent.

Shadow Council Macroeconomic Forecasts

2009*-4.0 %0.3%
20101.6 %1.6 %
20111,5 %1,7 %

Contributors:. M. Annunziata; M. Balmaseda; E. Bartsch; J. Cailloux; J. Callow; M. Diron, J. Henry, G. Horn, .J. Krämer; T. Mayer; E. Nielsen; J.-M. Six
Assumptions: All Forecasters assumed that the ECB would leave its key rate at 1% for the next six months
*) actual values

On the proposal of the EU Commission to strengthen fiscal surveillance

There was broad consensus on the Shadow Council that the proposals of the EU Commission on how to strengthen fiscal and macroeconomic surveillance were steps in the right direction. Members particularly praised the broadening of the approach taking away the almost exclusive focus on fiscal deficits by including debt levels and external imbalances into the analysis. Several members, however, questioned the credibility of fiscal sanctions, arguing that in a crisis situation such sanctions could hardly be imposed on cash strapped governments.

Members extensively discussed the alternative of strengthening market discipline by making clear that country default was a possibility and specifying as much as possible procedures and conditions of such an event. In this context the ECB was criticised for categorically excluding the possibility of a default. The proponents of this approach argued that there was more uncertainty in the market than necessary about the likelihood of a default and the specifics, including likely recovery rates. These members argued that less uncertainty would help prevent excessive pessimism as well as excessive complacency of investors, thus strengthening market discipline. Several members, however, questioned the wisdom of this proposal. Some said that it was not possible to be much more specific about conditions of a default and argued that uncertainty of investors about default probabilities and conditions was a normal feature of financial markets. Others mentioned widespread mistrust of the reliability of the judgement of financial markets or voiced concern that officially mentioning the possibility of default would cause excessive pessimism of investors.

Several members said that the Commission should go further in monitoring macroeconomic imbalances and structural differences between countries which could be the source of such imbalances. One member strongly endorsed a symmetrical approach, in which countries with a large trade surplus would also be monitored and would be obliged to carry relatively more of the burden of a possible support package for deficit countries.

Several members said that the ECB should impose differentiated haircuts on government bonds offered as collateral, with the size of the haircut depending on the respective countries deficits and debt levels. This was seen as a more effective way to impose fiscal discipline than fines.

Rate recommendation

There was unanimity that the ECB should not change interest rates at the next policy meeting on 7 October and no member expects a rate hike to become appropriate within the next three months. In contrast, the number of members who expressed a bias toward lower rates increased to four, from two a month ago. These members argued that economic indicators were deteriorating, while rising money market rates made refinancing more expensive and exerted upward pressure on the Euro.

Members' individual votes for 7. October

Jose AlzolaThe Observatory Groupno change
Marco Annunziata


no change
Elga Bartsch

Morgan Stanley

no change
Andrew BosomworthPimcono change *
Manuel Balmaseda


no change
Jacques Cailloux


no change*
Julian CallowBarclays Capitalno change *
Marie DironOxford Economicsno change
Janet Henry


no change
Gustav HornIMK Macroeconomic Policy Instituteno change*
Jörg Krämer


no change
Thomas Mayer

Deutsche Bank

no change
Erik NielsenGoldman Sachsno change
Jean-Michel SixStandard & Poor\'sno change
Angel UbideTudorno change

*) Bias toward lower rates CORRECTION: Janet Henry was erroneously recorded with a downward bias in this table's initial version. This error was corrected on 28 October.

Frankfurt 1 October 2010
Norbert Häring
Non-voting Chairman

Background information

The ECB Shadow Council was founded in 2002 upon an initiative of Handelsblatt, the German business and financial daily. It is an unofficial panel, independent of the ECB/Eurosystem, and comprising fifteen prominent European economists drawn from academia, financial institutions, consultancies and research institutes. The Shadow Council usually convenes by telephone conference on a monthly basis (though in November it holds a physical meeting). Its discussions take place a week before the monthly official ECB Governing Council "policy" meetings, and are intended to formulate an opinion as to what monetary policy decision its members believe that the ECB's Governing Council ought to undertake, both at its forthcoming meeting and also on a three month horizon.

Shadow Council members are encouraged to submit their own economic projections for euro area activity and inflation on a monthly basis, which constitutes the panel's forecast consensus as published each month. The Shadow Council's discussions and recommendations differ from surveys of economists concerning the outlook for ECB interest rates because the Shadow Council recommendation expresses the majority view of its' members opinion about what the ECB should do, rather than what they forecast it to do (and hence the "normative" views as expressed by Shadow Council members on what they consider the ECB ought to do can and often do differ from what they might say they expect the ECB to do). This "normative perspective can, however, give an early indication of shifts in the balance of opinion in the expert community, as can be seen by comparing the historic recommendations of the Shadow Council against subsequent decisions undertaken by the ECB Governing Council.

Members of the Shadow Council base their recommendations on the ECB's objectives as defined under the EU Treaty, though Shadow Council members do not necessarily adopt exactly the ECB's specific interpretation of its mandate: most Shadow Council members consider that a medium term inflation objective of two percent with a symmetric tolerance band around it would be clearer, more realistic and more appropriate than the definition adopted by the Governing Council, which defines price stability as an inflation rate of "below, but close to, two percent", in the medium term.

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