Konjunktur Shadow ECB Council Urges ECB to put Exit on Hold

At the meeting of the Shadow ECB Council on 25 November there was near-unanimity to recommend that the ECB put on hold any further phasing out of its non-standard measures, given the prevailing level of market tension. The Shadow Council urges the ECB to continue with the full allotment at its refinancing operations with banks and to stand ready to resume buying larger volumes of government bonds if there was a danger of market turbulence spreading to new and larger national bond markets. Members expressed deep concern at what they perceived as unnecessary fuelling of financial tensions by remarks of government officials, notably German ones. No member suggested a rate change but three members expressed a bias toward lower rates, one less than a month ago.

Members forecasts for growth and inflation

There was little change in average macroeconomic forecasts of Shadow Council members compared to the month before. Most members expect inflation to slowly converge from below toward the ECB?s goal of "below but close to two percent" by 2012. Growth is expected to remain lacklustre at around one and a half percent in the years 2010 to 2012.

Shadow Council Macroeconomic Forecasts

20101.6 %1.6%
20111.4 %1.6 %
20121,6 %1,8 %

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: Forecasters assumed on average that the ECB would leave its key rate at 1% for the next six months.

On dealing with weak banks

The Shadow Council unanimously issued a plea to European governments and the European Commission to dramatically increase their efforts to sort out the problems of the financial sector by re-capitalizing or closing insolvent banks. The problems of the banking sector are considered to be at the core of the ongoing financial crisis. Members argued that money from European stabilization funds and other efforts should be directed more and pre-emptively toward restoring the soundness of the financial sectors of the individual countries. The failure to do so was considered a major factor in the spreading of the fiscal crisis.

On the exit from extraordinary liquidity provision and bond purchases

The ECB has indicated that it will announce after the Governing Council meeting on 2 December how they will proceed with special liquidity provisions for banks and the ECB?s Securities Market Programme (SMP) after the turn of the year. The Shadow Council urged the ECB with near unanimity to leave the allotment procedures of the refinancing operations in place and to leave the SMP open for more bond purchases.

The consensus view was that market tensions, including on the money market, were intense and would be further exacerbated if the ECB were to announce a withdrawal of its special measures to support bank funding and bond markets. These members argued that a statement that the SMP would be closed could lead to a spike in interest rate spreads of bonds of peripheral countries and could thereby exacerbate the crisis. These members considered that the SMP was a valuable tool which helped to prevent a potential new bout of contagious market pessimism. Similarly, a reduction of liquidity provision for banks was feared to further increase banks funding problems, which might in turn feed into the fiscal crisis, as governments would be expected by markets to have to support failing banks.

A number of members went further to argue that the ECB should announce that it stood ready to do anything needed to protect financial stability. In particular, the ECB should be prepared to significantly step up the SMP. This was considered by these members a necessary and efficient means to prevent a spreading of the fiscal crisis to Spain.

The member who explicitly favoured a quick discontinuation of the special liquidity provisions for banks and a closure of the SMP argued that the fiscal crisis was for the governments to solve and that the ECB should instead concentrate on its mandate to preserve price stability, a task which could be compromised by efforts of the ECB to support bank and government finances.

On debt workout and currency union without fiscal union

Most members were highly critical of the public discussion at the level of governments about details of a future system for debt workouts involving haircuts for private investors. A majority considered this discussion and the leaks of working papers and proposals to have contributed significantly to exacerbating the crisis. Many members regarded a move toward closer fiscal integration as necessary to improve the institutional underpinnings of the currency union. It was noted that the credit facilities of the ESFS constituted a first step in that direction. Some members, however, held that there was a big difference between intergovernmental loans and real fiscal integration. A few members argued that until there was sufficient fiscal integration a mechanism was necessary that would limit the accumulation of large current account deficits and surpluses in within euro area trade. These members considered the emergent fiscal coordination through emergency loans to fiscally weak governments a direct consequence of the failure to do anything about such trade imbalances.

Rate recommendation

There was unanimity that the ECB should not change interest rates at the next policy meeting on 2 December and no member expects a rate hike to become appropriate within the next three months. Three members expressed a bias toward lower rates. This was one less than a month ago.

Members' individual votes for 2 December

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

Frankfurt 26 November 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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