REPORT on the Council recommendation for appointment of the Vice‑President of the European Central Bank
6.3.2018 - (N8-0053/2018 – C8‑0040/2018 – 2018/0804(NLE))
Committee on Economic and Monetary Affairs
Rapporteur: Roberto Gualtieri
PROPOSAL FOR A EUROPEAN PARLIAMENT DECISION
on the Council recommendation for appointment of the Vice‑President of the European Central Bank
(N8-0053/2018 – C8‑0040/2018 – 2018/0804(NLE))
The European Parliament,
– having regard to the Council’s recommendation of 20 February 2018 (N8-0053/2018),
– having regard to Article 283(2), second subparagraph, of the Treaty on the Functioning of the European Union, pursuant to which the European Council consulted Parliament (C8‑0040/2018),
– having regard to Rule 122 of its Rules of Procedure,
– having regard to the report of the Committee on Economic and Monetary Affairs (A8-0056/2018),
A. whereas, by letter of 22 February 2018, the European Council consulted Parliament on the nomination of Luis de Guindos as Vice‑President of the European Central Bank for a term of office of eight years, with effect from 1 June 2018;
B. whereas Parliament’s Committee on Economic and Monetary Affairs then proceeded to evaluate the credentials of the nominee, in particular in view of the requirements laid down in Article 283(2) of the Treaty on the Functioning of the European Union and in the light of the need for full independence of the ECB pursuant to Article 130 of that Treaty; whereas in carrying out that evaluation, the committee received a curriculum vitae from the nominee as well as his replies to the written questionnaire that had been sent to him;
C. whereas the committee subsequently held a one-and-a-quarter-hour hearing with the nominee on 26 February 2018, at which he made an opening statement and then responded to questions from the members of the committee;
D. whereas Parliament expresses concerns regarding gender balance, the selection procedure, the timing of the appointment and political independence, and requests that the Council engage in a dialogue with Parliament as regards how to improve the process for upcoming appointments;
1. Delivers a favourable opinion on the Council recommendation to appoint Luis de Guindos as Vice‑President of the European Central Bank;
2. Instructs its President to forward this decision to the European Council, the Council and the governments of the Member States.
-  OJ C 67, 22.2.2018, p. 1.
ANNEX 1: CURRICULUM VITAE OF Luis de Guindos
Luis de Guindos Jurado
Minister of Economy, Industry and Competitiveness
Date of Birth: 16th January 1960
- BSc in Economics from CUNEF, Colegio Universitario de Estudios Financieros - Graduated with honours.
- Tecnico Comercial y Economista del Estado (State Economist, grade “A” public examination, first in order of merit)
- Minister of Economy, Industry and Competitiveness (Since November 2016) Responsible for the areas of Economy and Business Support; International Economic Relations; Macroeconomic Analysis; the Spanish Treasury; International Trade and Investment; Research, Development and Innovation; and Industry.
- Minister of Economy and Competitiveness (December 2011-November 2016)
- Secretary of State for Economic Affairs (2002-2004)
- Secretary of the Government’s Commission for Economic Affairs (2002-2004)
- Secretary General for Economic and Competition Policy (2000-2002)
- Director General for Economic and Competition Policy (1996-2000)
- Member of the Ecofin Council, the Eurogroup and permanent guest to the G20
- Governor of the ESM (since 2012), the International Monetary Fund, the World Bank, the European Investment Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank, the African Development Bank, The Central American Bank for Economic Integration, the Asian Development Bank (since 2011), and the Asian Infrastructure Investment Bank (since 2017)
- Member of the Economic and Financial Committee of the EU (2002-2004)
- Vice Chairman of the Economic Policy Committee of the EU (1996-2000)
- Head of the Spanish Delegation to the ECOFlN Council during the Spanish Presidency of the EU (2002)
- Director of the IE Business School and PwC Center for the Finance Sector (Mar 20 I 0- Dec 2011)
- PricewaterhouseCooper, Responsible for Financial Services (Dec 2008 - Dec 2009)
- Nomura Securities, Chief Executive Officer (Sep 2008 - Dec 2008)
- Lehman Brothers, Chief Executive Officer Iberia (Apr 2006 - Sep 2008)
- AB Asesores - Chief Executive Officer (1988-1996)
- Board Member of Endesa, S.A., Endesa Chile, Unedisa, Logista and BMN.
ANNEX 2: ANSWERS BY Luis de Guindos TO THE QUESTIONNAIRE
A. Personal and professional background
1. Please highlight the main aspects of your professional skills in monetary, financial and business matters and the main aspects of your European and international experience.
I have a BSc in Economic and Business from CUNEF, graduated with honours. I also was first in order of merit in the public examination as State Economist and Trade Expert. My academic background is focused on monetary, financial, economic and business matters.
Besides, I have performed several duties as public officer, including Secretary of State for Economic Affairs, and Secretary General for Economic and Competition Policy. In those roles I have had the chance to participate in the design of the economic policies that led Spain to enter the Monetary Union fulfilling all requirements.
Since 2011, I have been Minister of Economy, Industry and Competitiveness of Spain. As such, I have been in charge of the Treasury, as well as the departments of Economy and Business Support, International Economic Affairs, Macroeconomic Analysis, International Investment and Commerce, Research, Development and Innovation, and Industry.
From this position, I have fostered a deep reform of the Spanish financial sector that has included the recapitalization and restructuring of the system as well as other measures to assure that any bank resolution in the future is implemented without resorting to taxpayers’ money. Many of these measures were set into place through the financial assistance program granted to Spain by the European Stability Mechanism (ESM). All these actions have permitted the restoration of the correct functioning of the financial system, which is the main conveyor belt of the monetary policy.
As minister of Economy, I have also represented Spain in the Economic and Financial Affairs Council of the EU and the Eurogroup. Within those forums I have contributed to the construction of the Economic and Monetary Union.
I have also been permanent guest to the G20 and governor of the European Stability Mechanism (ESM), the International Monetary Fund, the World Bank, the European Investment Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank, the African Development Bank, the Central American Bank for Economic Integration, the Asian Development Bank, and the Asian Infrastructure Investment Bank.
Finally, I have worked for several private firms related to the financial sector (Responsible for Financial Services for PricewaterhouseCoopers, Chief Executive Officer Iberia for Lehman Brothers and Nomura Securities, Chief Executive Officer for AB Asesores) and to the academic sector (Director of the IE Business Scholl and PwC Centre for the Finance Sector).
I have also been Board member of Endesa, S.A; Endesa Chile, Unedisa, Logista, and BMN.
2. Do you have any business or financial holdings or any other commitments which might conflict you with your prospective duties, and are there any other relevant personal or other factors that need to be taken account of by the Parliament when considering your nomination?
No, I do not have business or commitments that might conflict with my prospective duties. I only own a Personal Pension Plan, and a stake in an open ended Mutual Fund. In both cases the managing company is Mutuactivos, the investment branch of an insurance company. I do not hold, directly or indirectly, any other financial assets.
I also own a house in the South of Spain, and 50% of an apartment in Madrid, as well as other real estate inherited from my parents.
Regarding other personal information that might be relevant to the position in the ECB, my daughter, who is 30 years old, works as Junior Risk Analyst in a Spanish retail bank. On the other hand, my son, who is 26 years old, works in the investment department of an insurance company.
3. What would be the guiding objectives you will pursue during mandate at the European Central Bank?
I will abide by the mandate the Treaty of the European Union assigns to the European Central Bank: to maintain price stability throughout the euro area as well as to support the general economic policies in the Union. My contribution to the ECB will include a comprehensive and holistic approach when making decisions, to take into account the effects of all interacting economic policies.
To pursue those goals, I will closely observe the ECB’s main guiding principles, independence and transparency, for without them it would not be possible to fully enforce an effective monetary policy
B. ECB monetary policy
4. How should the ECB conduct its monetary policy in the current macroeconomic conditions?
The first thing to remember is that ECB’s mandate is to ensure that medium-term inflation in the euro area is below but close to 2%.
Despite the on-going recovery in economic activity across the area, this has yet to translate into a sustained pick up in the medium-term inflation outlook, which remains subdued (the ECB projects average headline inflation at 1.4% in 2018 and 1.5% in 2019). Underlying inflation pressures are still muted as labour market slack remains significant. The improvements in labour markets that we have observed still need time to translate into more dynamic wage growth. Moreover, the current inflation outlook is still dependent to some extent on the stimulus provided by the ECB’s extraordinary measures. For this reason, a continuous reassessment of the economic and monetary conditions of the euro area and of the effects of the measures deployed so far is warranted. The ECB is expected to maintain its current monetary policy stance, until underlying inflation pressures build up and sufficient signs of a sustained adjustment in inflation are observed. Therefore, the ECB should stand ready to adjust its stance as necessary in order to fulfil its mandate.
The ECB must also be vigilant on any eventual undue buildup of financial risks in the current environment of very low interest rates and loose monetary and financial conditions.
5. What is your view on the heterogeneity of monetary conditions and access to credit across the euro area and its impact on unitary monetary policy of the ECB?
Any monetary area that is sufficiently large is by nature bound to have some degree of heterogeneity in economic structures across its countries or regions. The euro area is no exception.
The ECB sets its policy so that it suits the whole of the euro area. Economic heterogeneity complicates the conduct of monetary policy. The more intense structural and cyclical convergence is, the more likely it is that monetary policy is appropriate for each Member State. Sometimes the ECB’s policy is too loose for some Member States and too tight for others. This was the case during the run up to the crisis. Sharp reductions in interest rates in some countries after the launch of the euro led to unsustainable expansions associated to growing imbalances that later aggravated the crisis. In that context, divergence in growth and inflation rates was fueled by a monetary policy that could not fit all.
Heterogeneity of monetary conditions depends upon many factors, the main one still being the different cyclical position due to the various impact of the financial crisis on each economy and the different pace of recovery. In addition, specific structural factors also have an influence.
During the crisis, an additional difficulty was the interplay between (a) cross-country divergences in terms of fiscal position and soundness of national banking sectors and (b) the absence of a true fiscal and banking union. All of this led to a certain degree of financial fragmentation across jurisdictions, which indeed impaired the transmission of the single monetary policy. In this regard, some of ECB’s extraordinary measures in the context of the crisis (such as the Securities Market Programme, the Outright Monetary Transactions and the Long-Term Refinancing Transactions programmes) have contributed decisively to undo some of this fragmentation, which has subsided considerably, as reflected for instance in the convergence observed in bank funding costs and other financial conditions. As a result, monetary policy has contributed to mitigating heterogeneity helping all economies leave recession and deflationary pressures behind. Progress towards a banking union has also helped to loosen the link between banks and sovereigns.
In the longer-term, further efforts are called for to get the euro area closer to an optimal currency area, namely, the speeding up of structural reforms and the build-up of fiscal space to increase the capacity of each economy to adapt to asymmetric shocks and to the evolving monetary conditions. Deepening integration, in particular in the financial sector, will contribute to reducing heterogeneity. In those circumstances, economies will be more synchronized and at the same time, they will be better prepared to cope with adverse shocks, reducing the overall burden on monetary policy.
6. What are your views on the increase in the size of the ESCB balance-sheet due to the Asset Purchase programme (APP)?
In the context of the financial and economic crisis, the ECB cut its key nominal interest rates down to levels close to their effective lower bound, but that was not enough to bring inflation close to its goal. As a result, other less conventional monetary policy measures had to be put in place.
One of them was the Asset Purchase Programme (APP) that was designed to increase the Eurosystem’s balance sheet, to counter disinflationary expectations under already low interest rates. The APP has been instrumental in stabilizing financial conditions across the euro area. It improved the financial conditions that are relevant for the real economy through two channels. First, these purchases increased the prices and hence reduced the yields of the purchased assets. This led investors, including banks, to seek higher yields for instance by lending more to the real economy. Second, to the extent that these purchases signaled the ECB’s commitment to an accommodative monetary policy stance, it also led to expectations of lower policy interest rates going forward. This exerted further downward pressure on long-term interest rates, which are key factor of households’ and firms’ investment decisions.
A large Eurosystem balance sheet is just the natural consequence of this program. The ECB’s balance sheet has approximately quadrupled during the last decade.
As inflation adjusts to levels consistent with its price stability mandate, the ECB will have to consider how large its balance sheet should be in the future, how fast to converge to the desired size and its optimal composition.
7. What do you consider the appropriate time horizon for the ending of the APP?
As already mentioned, the APP was introduced in response to extraordinary circumstances, but as these are now beginning to subside the ECB should intend to return gradually to a more conventional policy. It is difficult, however, to set a specific timing for the end of this programme.
The ECB Governing Council has been clear in its communication about the fact that net asset purchases will continue at the current monthly pace of EUR30 billion until the end of September this year, or beyond if necessary. The path of purchases after that period is something that the ECB will have to decide in due course, based on the prevailing outlook for inflation at that moment and the Governing Council’s assessment of the appropriate degree of monetary stimulus needed thereafter. However, it should be noted that once net purchases have come to an end, the ECB is expected to keep reinvesting principal payments from maturing assets for as long as necessary. Looking further ahead, the process of monetary policy normalization should be guided by the assessment of the monetary policy stance needed to fulfill the ECB’s price stability mandate.
8. How will you ensure transparency regarding the implementation of the Asset Purchase Programme?
Transparency has been a major concern of the ECB since the beginning of the Asset Purchase Programme. External communication is a key support for a continued smooth implementation of asset purchases. Despite the complex decentralised implementation, efforts to ensure transparency should be a priority. In fact, transparency is a desirable quality of every government policy. In my view, the ECB has been very transparent regarding the implementation of the APP. The parameters of the program are clearly laid out, for instance the requirement to allocate the purchases across jurisdiction according to the capital key. Moreover, the ECB provides timely and detailed information on various aspects of the programme (i.e. a weekly consolidated financial balance sheet, a monthly account of its holdings in each of the four programs of the APP, monthly and cumulative purchases of eligible assets per country in the PSPP, etc.).
Overall, this level of transparency is at least comparable to that of other major central banks as regards their large-scale asset purchase programmes. Furthermore, the current regime strikes the right balance, ensuring transparency and making it compatible with the required flexibility in the programme’s implementation to maximize its effectiveness and discourage market arbitration. For instance, purchases need not follow capital keys at a specific point in time, but the overall stock of holding is indeed based on capital keys.
In any case, external communication of policy is an essential part of instrument design. For this reason, every aspect of what to publish and with which frequency should be debated and agreed to within the Governing Council.
9. What are the conditions that need to be put in place to manage an interest rate increase without disruptive effects on sovereigns and markets?
First of all, it is necessary to stress that the ECB is fully independent, with regards to the design and implementation of its policies and instruments, in order to fulfil its mandate. As emphasized over the recent period by some ECB Governing Council members, once it starts, the process of monetary policy normalization –which includes the increase in interest rates– will need to satisfy two core premises. First, it will have to be predictable and transparent, in order to ensure a smooth communication with market participants. Second, it will have to be gradual and commensurate with the prevailing inflation outlook.
Sovereigns are, in principle, no different from other market participants. It is their duty to prepare and adapt to possible changes in monetary policy; it is not the ECB’s duty to design policy to make it easier to issue sovereign debt. Sovereign issuers have been reducing their issuance needs and increasing the average life of issuance for several years now, which will improve the resilience of their interest burden in this scenario. Governments should also take advantage of the good economic times to rebuild fiscal buffers and prepare their economies to better withstand future shocks such as an increase of interest rates. Ultimately, interest rates will not remain so low forever.
Forward guidance, as applied currently in the Eurozone, the US, the UK and Japan, goes a long way to prepare markets for an increase in interest rates. The futures market is quite liquid, enabling market agents to express their expectations fairly precisely. Any increase should, ideally, be gradual and anticipated by the market.
In summary, the way decisions are being currently implemented and communicated are preparing the market well for a normalisation of monetary policy.
10. How in your view can the ECB contribute to economic growth and full employment while fully complying with its primary objective to maintain price stability? What are in your view additional monetary policy measures that would improve the positive effects of monetary policy on the real economy?
It is important to remember that achieving price stability is the explicit mandate of the ECB. Ensuring relatively low and stable levels of inflation is the best contribution that the monetary authority can make to economic growth. At the same time, ensuring that economic growth does not deviate much from its potential rate is essential to achieve stable inflation. But again, this should concern central bankers only as a means to achieving price stability.
There is abundant evidence that in the long run there is no trade-off between inflation and growth. As mentioned, price stability is a pre-requisite for sustained growth. However, such a trade-off can appear over the short run, in particular, during recessions. In this context, the ECB focuses on price stability and, by doing so and using the available flexibility - introducing a whole set of unconventional policy measures to address the recent crisis- it has helped to prevent the economy from falling into deflation. The package of measures applied by the ECB since 2012 seems to have been enough to support both price stability and economic recovery. Concrete evidence in this regard have been the compression of public debt spreads as well as the convergence of interest rates charged by credit institutions to small and medium-sized enterprises. Nonetheless, this convergence would have not been possible without the improvements in financial supervision, the strengthening of banks’ liquidity and capital positions and the structural reforms undertaken in many euro area countries over the last years. Moreover, financial stability is also a precondition for sustained growth. To the extent that the ECB’s effective supervision has prevented further financial instability, it has also supported growth and employment. This way, the ECB has also made a great contribution to its secondary objectives.
The ECB policy measures that are currently in place seem appropriate from the point of view of the current inflation outlook and the desired monetary policy stance. Regarding future measures, this is something that will have to be decided based on the prevailing outlook for inflation and overall economic and financial conditions of the euro area.
11. What are your views on the risks associated with the Corporate Sector Purchase Programme (CSPP)? Would you see any distortive effects on competition within the Single Market? How do you think possible distortive effects of the CSPP can be minimised? Do you think it should integrate the Paris and the SDG goals?
In my view, the CSPP has been quite successful in improving access to funding by companies, not only directly for the large corporations whose bonds are typically eligible for purchases under the CSPP, but also indirectly across all firms and other market segments, in particular the small and medium-sized enterprises (SMEs) that have no access to bond markets. Favourable bond market conditions have positive spillover effects to SMEs, for instance by leading large corporations to rely more on bond financing and thus leaving more space in banks’ balance sheet to provide loans to SMEs. The CSPP has, therefore, increased the effectiveness of monetary policy transmission through the banking system by directly lowering the market-based financing costs of non-financial corporations.
Having said this, the ECB will have to remain vigilant regarding a potential build-up of imbalances and risks in certain segments of the corporate debt market as a result of very loose financial conditions.
In order to prevent the CSPP’s potential distortive effects on competition within the Single Market, the ECB applies some mitigating measures on primary and secondary market liquidity. Its participation on primary market purchases strikes a balance between the objective of the program and the need to ensure an adequate market functioning. Similarly, when buying on the secondary market, the ECB considers the scarcity of specific debt instruments and general market conditions in order not to distort prices and liquidity. Furthermore, purchases reflect proportionally all eligible outstanding issues, with market capitalisation providing a weighting for each of the different jurisdictions of issuance.
Regarding the Paris and Sustainable Development Goals (SDG), we should start recognising that sustainable development and environmental protection are goals of the EU established in the primary legislation. Thus, support from the Eurosystem shall be warranted, provided it fully respects the ECB’s primary objective of price stability over the medium term. In this field, it is important to take into account ongoing work on sustainable finance in different European and international fora. For example, the EU High-Level Expert Group on Sustainable Finance has recently published a report that was presented to the ECOFIN Council in February 2017 putting forward recommendations that encompass the development of a taxonomy and a labelling system for green bonds and green exposures and that will be taken into account under the upcoming Action Plan by the Commission. Initiatives are also being developed by the G20 under the Green Finance Study Group and by the FSB under the Task Force on Climate-related Financial Disclosures to strengthen disclosure of climate-related risks and to foster a better understanding on whether these risks could be better integrated into regulatory and risk-management frameworks. These initiatives need further development and support from the ECB will be important. Pending further development, these initiatives could provide the ECB with means for taking into account environmental concerns when undertaking purchases (for example, taking into account the mentioned taxonomy). Nevertheless, before incorporating green factors into its monetary policy framework, the ECB should carefully address any risks in terms of financial stability that would derive from considering criteria beyond credit risk that might not be justified from a prudential perspective.
12. How do you evaluate the currently increasing share of the corporate sector purchase programme on the primary market and at the same time the currently decreasing share of the public sector purchase programme on the secondary market?
First of all, these are two programs that are undertaken under different terms. Thus, while CSPP purchases are executed both on primary and secondary markets, PSPP purchases are only executed on the secondary market, since the ECB is not allowed to buy sovereign bonds on primary markets under Article 123 of the Treaty on the Functioning of the European Union.
The CSPP’s relatively large share in the primary market is a natural consequence of the program’s design, as the CSPP is incentivizing new issuances. Yet, the program is also designed to ensure that the Eurosystem acquires a relatively small share of new issuances, (in particular, no more than 30% per issuance) with a view to ensuring a smooth market functioning.
With regard to the PSPP, its decreasing share in secondary market activity is a consequence of the recent reduction in the monthly target for APP net purchases from 60 to 30 billion euros. Most of this reduction has concentrated on the PSPP part of the APP, reflecting the recent evolution of the relative supply of public sector bonds vis-à-vis other eligible assets.
13. What is your view on the implementation of the Emerging Liquidity Assistance (ELA)? What could be improved in the decision-making process on granting ELA?
Financial stability is a necessary condition for an adequate transmission of monetary policy. National Central Banks (NCBs) may decide to provide ELA to solvent financial institutions that are facing temporary liquidity problems, outside of normal Eurosystem monetary policy operations.
ELA is provided under the responsibility of NCBs, at their cost and risk, and always to solvent institutions. NCBs may decide whether to grant ELA to a specific institution, the collateral that will be requested and other risk control measures to put in place.
However, NCBs’ discretion is limited by the Governing Council of the ECB who may prohibit, limit or condition ELA operations if it finds that they interfere with the objectives and tasks of the ESCB. Monitoring by the Governing Council increases with the size of ELA requested. The framework for ELA also provides for flexibility to respond to particular urgencies or to avoid potential systemic implications: the Governing Council may decide not to object to the provision of ELA to specific banks up to a certain threshold and within a pre-defined period of time.
ELA provision has been instrumental in the conduct of Eurosystem monetary policy, especially during the crisis. This contributed to financial stability and counteracted negative confidence effects, thus supporting the transmission of monetary policy, within the ECB mandate.
The rules are clear in this regard. A credit institution could have access to Emergency Liquidity Assistance if it is solvent and has enough available assets to guarantee that the money provided will be recovered, so that the central bank, and in the end the citizens, suffer no loss.
The decision making process is transparent. The “ELA Agreement” (Agreement on Emergency liquidity assistance) was published by the ECB last year. It contains all the details of the process: from the definition of solvency of the bank to the division of responsibilities between the national central bank granting the loan and the European Central Bank not objecting to it.
14. Should we worry about current levels of Target imbalances?
Target2 imbalances today tell a very different story from those of 2011 and 2012. Back then the continuity of EMU was – incorrectly, as it turned out -- put in doubt. In this context, countries with current account deficits were feared to be in danger of devaluation, and countries with current account surpluses were assigned some probabilities of revaluation, so the rational response of the market was capital flight away from the so-called periphery and into Germany.
The increase in TARGET2 balances since late 2014 differs from the previous episode of rising balances. The implementation of the Asset Purchase Programme distorts the signals sent by Target imbalances and can lead to misinterpretations. It is well known that some of these Target imbalances have a mechanical origin, related to how APP purchases are conducted. It is the status of Frankfurt as a financial center, and the Bundesbank’s status as Target2 counterparty for most international banks, that is behind the Bundesbank’s increase in its creditor position. In short, I think that current Target imbalances are not something we should worry about. Running in favour of this perspective is the fact that asset prices are not reflecting any distress, as it was indeed the case during the sovereign debt crisis of 2011-2012.
In any case, it is important that the ECB continues its close monitoring of TARGET2 balances and a wide range of indicators that provide information about the levels of market stress, as it does today.
15. What are the risks to monetary stability related to the development of virtual currencies such as Bitcoin? Which role do you think the ECB should play in addressing virtual currencies?
Let me start by stating the obvious: Bitcoin and other cryptocurrencies can today hardly be presented as substitutes for central bank issued money. Several problems, mostly related to the early stages of the implementation of the DLT technology, plague them. DLT is still relatively inefficient, transaction speed is limited and constant refinements in the technological configurations have produced almost 900 hundred different currencies so far. Besides, Bitcoin and the main other so called alt-coins are concentrated in few hands, and this, together with scarce liquidity, provide for an extremely volatile environment, prone to speculative bubbles and bursts episodes. Hence, crypto currencies are today not able to perform the essential functions of money (means of payment, unit of account and storage of value), in a sustainable way.
Privately-issued digital currencies may eventually present central banks with challenges. In principle, for a central bank, the challenges posed by a digital currency would basically be the same as those posed by the presence of a competing foreign currency. For the global economy, competition among currencies causes supply and demand to determine an equilibrium price, the exchange rate, which reflects the relative utility of the currencies.
Broadly speaking, if the circulation of one or more privately issued digital currencies were to grow to significant levels, monetary policy would be affected in the same way as with any other currency. The Central Bank (and regulators and oversight agencies) would have to monitor exchange rates, payment systems of such currencies, financial markets of assets denominated in the new currencies and interconnections among markets and market participants and the traditional financial system. This monitoring would be necessary to guarantee the effectiveness of monetary impulses as well as the integrity of payment systems and financial markets, to preserve financial stability and isolate the system from shocks. Moreover, new digital currency markets and payments should be subject to all regulations on AML CTF and investor protection.
So far, crypto-assets do not pose a serious risk to financial stability, as highlighted by the FSB, given their limited volume and interconnectedness. Going forward, crypto-assets might affect financial stability if they increase their volume and interconnectedness with the financial sector.
Ultimately, Central Banks could co-opt the DLT technology underpinning Bitcoin to issue a sovereign digital currency. Base Digital Money could help Central Banks retain control over the monetary mechanisms but may have important implications on fragmentary banking that would have to be further studied and.
Regulating digital currencies is the responsibility of financial regulators worldwide. Beyond those long term considerations on Monetary Policy, the ECB should monitor developments in the crypto currency scene and the interconnection between the traditional financial system and those markets. Insofar as market volumes remain relatively small and financial institutions stay away from these risky assets, the ECB does not need to intervene, but it should remain vigilant of the potential impact on financial stability and warn all stakeholders of the risks involved.
16. How do you assess the interactions between payment systems and monetary policy? What should be the role of the ECB, as central bank of issue, on the oversight of CCPs?
Payment systems are essential for the implementation of monetary policy. The central bank is dependent on a secure and efficient payment system that is a prerequisite for a smooth transmission of monetary policy and the preservation of financial stability. Therefore, one of the basic tasks of the Eurosystem is the promotion of the smooth operation of payment systems (Article 127.2 of the Treaty on the Functioning of the EU) and ECB’s oversight is aimed at safeguarding the transmission channel for monetary policy. If funds do not flow smoothly between market participants, a disorderly behaviour of interest rates can happen and could end up affecting their formation. In this regard, when the payment system is dysfunctional monetary policy is impaired. Moreover, the set-up of TARGET system by the Eurosystem has provided an EU-wide payment system which is used for the settlement of central bank operations. TARGET has become an essential vehicle for the implementation of the monetary policy for the Eurosystem, and has helped to create a single money market within the euro area.
Regarding the role of the ECB as central bank of issue on the oversight of the CCPs, it is foreseen that the ongoing EMIR review will address the need for the ECB to have adequate powers to ensure that it properly monitors potential risks deriving from CCPs for the conduct of monetary policy and the functioning of payment systems. The proposal implies among other things the strengthening of the role played by the central banks of the EU in the regulatory framework. This strengthening is necessary due to, first, the continued growth of central clearing and financial risk concentration in CCPs which increases the potential disruptive effects that CCPs can have on the implementation of monetary policy. And second, the UK departure from the EU implies that a very large part of euro-denominated clearing activities may be performed from outside the EU in the future.
17. What are the risks related to Brexit for financial stability?
The impact of Brexit will depend on the characteristics of the future relationship between the UK and EU. As we do not have clarity on the final outcome of the negotiations, we should be prepared for any eventuality, including a cliff-edge scenario. A transitional arrangement consistent with the December European Council guidelines would obviously smooth the transition. However, there is still uncertainty about this whole process.
From the point of view of the European market of financial services, if the volume of business traded in London were to be fragmented and carried out in one or several European or international markets several consequences would follow:
Fragmentation would bring temporary structural costs to the EU capital market, due to the loss of economies of scale and network, decreased liquidity and depth of markets. However, over the longer term such costs would decrease as markets replacing the City become deeper.
The strong cross-border links between the UK and the EU in the provision of financial services mean that an extreme event of disorderly Brexit could pose significant financial stability risks. One area of concern is that of OTC derivative and insurance contracts. In particular, with regard to CCPs, the transition generates uncertainty, because it cannot be assumed that the members of the new clearing houses will be able to balance supply and demand without interruption. The stock of transactions and the new transactions of the euro markets must be carried out or migrate to CCPs authorized or recognized by the EU, replacing the previous ones. This is a complex process that requires time. More broadly, there are also concerns about the transition to new rules/legal standards.
However, several measures can mitigate the uncertainty surrounding the transition: early announcements about the future framework, provisional authorizations, grandfathering mechanisms and/or time for the novation of all contracts are all steps that could contribute to an orderly transition.
A lot hangs on the strategic decisions of the banks operating most in these markets. It is essential that concerned entities prepare timely for dealing with frictions during the transition and to adapt to any possible future scenarios.
Both, the ECB and NCBs should be ready to face the transition and the relocation of financial entities form the UK. Clear criteria on how to treat these entities are warranted (i.e. validation of the internal models they were using in the UK) and supervisors should ensure that these relocated entities are not mere empty shells that keep all their activity and resources in the UK.
If proper preparations for the transition are made, we should not expect significant long-term implications for the financial stability and economy of the euro area.
18. How could the economic governance framework and in particular its implementation be enhanced? UE
In a currency union Member States give up important stabilisation tools. This should be compensated by strengthening other mechanisms to prevent and absorb shocks.
• First, financial markets redistribute risks in a monetary union and increase private sector risk sharing. The completion of the Banking and Capital Markets Unions has the objective of delivering integrated financial markets that ensure an efficient allocation of resources across the EMU. These should be completed as a matter of priority.
• Second, it is essential to increase the resiliency of individual economies and prevent divergences of competitiveness between members of the EMU that lead to unsustainable imbalances. This requires a strong, well-functioning economic governance framework that ensures financial stability. Structural reforms are important to ensure convergence in the EU, but even more important for countries sharing a currency and the smooth functioning of the Economic and Monetary Union.
• Member States need to be aware that being part of a monetary union calls for a deeper coordination of economic policies, in line with the deeper level of integration.
The crisis demonstrated that price stability delivered by the ECB together with public finances coordinated though the Stability and Growth Pact (SGP) were insufficient to ensure financial stability in the euro area. The build-up of imbalances can put financial stability at risk and impair the transmission mechanisms of monetary policy. This is why substantial reforms to the euro area’s economic governance were undertaken: besides the enhancement of the Stability and Growth Pact and greater budgetary coordination, a framework for the surveillance and correction of macroeconomic imbalances was put in place. The Macroeconomic Imbalances Procedure (MIP) is intended to monitor the build-up of imbalances and trigger corrective measures when needed. In addition, the European semester requires Member States to undertake the measures necessary to tackle their main challenges and seeks to coordinate the implementation of structural reforms.
These were all necessary and useful reforms to the economic governance, but more remains to be done.
• In fiscal policies, there are growing calls for a simplification of fiscal rules to ensure greater ownership and a transparent and consistent implementation of agreed rules. What is important is that the Stability and Growth Pact ensures that Member States build-up fiscal buffers during good times. Agreed fiscal rules then need to be enforced decisively, since otherwise Member States will remain vulnerable to the next crisis in view of the limited fiscal space available today.
• In addition, there is room to improve the MIP so that it becomes a true early warning tool of the build-up of imbalances that triggers corrective action.
• The implementation of structural reforms also needs to be improved. Member States should take full ownership of the reforms needed to address their imbalances and assume their individual responsibilities.
• Member States need to deliver on their commitments, while the European semester should provide the framework for an appropriate coordination and sequencing of structural reforms in order to internalize possible spill-overs. In this respect, ensuring the consistency between individual and euro area recommendations can strengthen the resilience of the monetary union.
Structural reforms are essential to increase the resilience of the monetary union and maintain high levels of long-term sustainable growth and employment. They unlock potential growth and, by tackling bottlenecks to investment, create an environment that fosters investments. In addition, structural reforms are the main risk reduction mechanism in a monetary union and they will help build the necessary political trust to make further progress in other reforms that are necessary for deepening the EMU.
All these actions will contribute to making individual economies and the euro area as a whole more resilient to adverse shocks. However, even the most flexible and efficient markets do not have the capacity to fully absorb very large shocks. The euro area needs an appropriate safety net and this is precisely what the current debate on strengthening the ESM aims to achieve (see question related to the ESM).
With a longer term perspective, the euro area would benefit from better coordination of fiscal policies and the capacity to implement an appropriate policy mix in the euro area. In this respect, a fiscal stabilization instrument could be useful to help cope with large shocks without having to rely excessively on the ECB for stabilization purposes. Its design would need to cater to moral hazard concerns, so making access to this capacity conditional on the fulfilment of structural reform commitments and compliance with fiscal rules could provide adequate incentives for sound economic policies.
At the Euro Summit in December 2017, the Heads of State and Government decided to prioritize discussions on the Banking Union and the future of the ESM, with a view to taking a first set of decisions in June. At the same time, discussions are expected to continue on other issues with a longer term perspective. Now that the economic outlook is improved is the time to reflect on EMU economic governance to ensure its resilience ahead of crises to come.
19. What is your view on the ongoing debate on the persistent high levels of public debt in the euro area?
The crisis led to a substantial deterioration of public finances in the EU and in the euro area given that governments allowed deficits to expand in order to support the economy, but also because implicit liabilities from some Member States’ banking sector materialized in the public sector balance sheet. Investors raised concerns about the sustainability of public debt in some countries and as a consequence financial markets in the euro area fragmented along national lines.
Measures were taken to prevent this from happening again, including the creation of the Banking Union (as mentioned above) and substantial reforms aimed at reinforcing budgetary discipline and increasing the coordination of economic policies. As a result of these efforts, the EU is one of the regions where most fiscal consolidation has been achieved despite a fragile recovery and Members States are successfully exiting the Excessive Deficit Procedure. As of next years, all Member States are expected to be under the preventive arm of the Stability and Growth Pact. The consolidation effort has put the debt-to-GDP ratio in the euro area firmly on a downward trend.
However, this positive aggregate trend hides important divergences between Member States. In this regard, it is of paramount importance to use the current positive economic environment to build-up fiscal buffers. This is especially the case for highly indebted Member States, which need to adopt an appropriate consolidation path in line with their cyclical situation. Indeed, fiscal policies should create sufficient fiscal space in good times to counter adverse shocks when they come. Otherwise, the euro area will remain vulnerable to future downturns. This means that Member States have to meet their responsibilities under the Stability and Growth Pact.
This does not mean that there is no room to improve the fiscal framework in the euro area over the medium term. There are growing calls for simplifying fiscal rules and basing fiscal policy recommendations on observable indicators under the control of the government that reflect a shared understanding of the cyclical situation. This would increase the ownership of fiscal rules and facilitate their consistent enforcement.
Finally, we should not forget that growth remains essential for the sustainability of public finances. In this respect, structural reforms that unlock potential growth and increase the competitiveness of euro area economies will help manage the current stock of debt accumulated after the crisis by bringing long term sustainable growth and employment.
20. How do you assess the recent evolution of the USD/EUR exchange rate?
While the exchange rate per se is not part of the EBC’s mandate (which is focused on stabilizing consumer price inflation), it is certainly one of the financial prices that the ECB monitors closely in its assessment of the macroeconomic outlook, which in turn is a key input of its monetary policy decisions.
The recent appreciation of the euro (18% during the last year) is not unusual by historical standards: there have been several episodes of similar or even sharper gains since the inception of the single currency. The appreciation of the euro is associated to a reassessment of monetary policy prospects by market participants, in view of the positive macroeconomic developments in the euro area, as well as the expected tapering of asset purchases by the ECB. To a large extent this recent appreciation of the euro area’s nominal effective exchange rate reflects positive developments, such as an improvement in the economic outlook and increasing market confidence, in a context of current account surplus and hence, this movement is associated to the improving fundamentals. Obviously, this appreciation is expected to have some restraining effect on exports and inflation. However, if the appreciating trend persists or is too sharp, it could have a greater moderating impact on growth and inflation making it more difficult for the ECB to achieve its inflation objective. In any case, the ECB should remain vigilant of developments in exchange rates and assess on a continued basis the challenges they may pose for price stability.
21. How do you assess the achievements of the G20? What are your views on the current level of coordination between the main central banks?
The G20 has proved to be a key forum to enhance international economic cooperation and foster an open and integrated global economy. There are two areas where the G20 has been especially effective. On the one hand, the G20 has strengthened the resilience of the global financial system by mandating the Financial Stability Board (FSB) to develop a comprehensive package of reforms, especially to address moral hazard from global systemically important institutions. On the other hand, and with the collaboration of the OECD, the G20 has been instrumental in fighting against tax evasion and money laundering, by launching a set of measures addressing base erosion and profit shifting and favouring the automatic exchange of fiscal information. Currently, the G20 is facing new challenges, such as addressing financial innovation in both the financial system (FinTech) and taxation, which evidences that it remains fully relevant in its role in terms of global coordination.
Central banks can contribute to exchange rate stability by carefully communicating their monetary policy stance in advance, as has been improved over recent years through “forward guidance”. In this sense, it is very positive that IMFC, G7 and G20 communiqués keep reflecting the adverse implications that excessive volatility and disorderly movements in exchange rates can have for economic and financial stability and the commitment by countries’ authorities to refrain from competitive devaluations and from targeting exchange rates for competitive purposes. The ECB should be in constant communication with other currencies’ central banks. However, there is limited room to engage in more far-reaching coordination of monetary policy globally, since central banks have domestic mandates. Having said this, I think in recent years we have witnessed a reasonably satisfactory degree of cooperation among the major central banks in advanced economies, as reflected for instance in their smooth communication about exchange rates, their pro-global-stability stance, and their provision of liquidity in foreign currency. I think this coordination is welcome and should be further strengthened in the future.
C. Financial stability and supervision
22. How can we address the legacy from the crisis of high levels of the stock of non-performing loans as well as the risks in the flow of non-performing loans?
Although concentrated in specific banks, NPLs are probably the biggest challenge that the euro area financial system is currently facing, since they are denting confidence in European banks. NPLs weigh on the balance sheets of banks, not just by hampering their potential profitability but also by constraining their ability to lend. According to the European Banking Authority (EBA), NPLs have been decreasing since 2014 but both the ratio and the stock remain high (circa 800 billion euros).
The three most relevant aspects that need to be taken into account when dealing with NPLs are transparency, proper valuation and adequate provisioning. Along these lines, measures recently proposed by the ECB and the Commission go in the right direction.
A step-by-step approach is called for, combining continuous pressure from supervisors (e.g. the SSM), to increase provisions and to sell non-performing assets, together with improvements in the regulatory framework in some countries, so that collateral repossession is easier and the sale of non-performing loans and foreclosed assets more effective. The speed of the process may also need to be mindful of the capital levels of the banks as well as their ability to raise funds on markets.
Tackling NPLs requires a holistic approach, as set out in the July 2017 ECOFIN Council conclusions on an Action plan to tackle NPLs in Europe. This encompasses a wide variety of measures, from prudential backstops to insolvency frameworks or the development of secondary markets.
23. How do you assess the high level of level 2 and level 3 assets in many banks balance sheets? Are these assets properly taken into account by the current supervisory framework?
The key for the adequate management and supervision of a bank lies in having proper information on the true value of its assets. The higher the lack of accuracy in this regard, the more complex and the less reliable is any assessment on its solvency.
Thus, level 2 and level 3 assets, which do not have regular market pricing and whose value has to be estimated on the basis of other benchmarks or complex mathematical models, challenge the work of accountants, supervisors and bank managers.
That is precisely why the framework set by the FSB to determine which banks are deemed to be globally systemic (Global Systemically Important Banks –G-SIBs) takes into account the volume of this type of assets as one of the main elements to specify the degree of complexity of a bank. On the basis of this classification, G-SIBs are subject to more stringent solvency and resolution requirements.
In any case, there seems to be a questionable tendency to automatically stigmatize these assets and consider them as “problem assets”, like NPLs, forborne loans or foreclosed assets.
Nevertheless, these assets must be properly addressed by supervisors. First of all, we need to be sure that level 2 and level 3 assets are properly identified and classified on banks’ balance sheets. Secondly, appropriate valuation of both types of assets needs to be monitored by supervisors. This is particularly the case for large and complex banks. Similarly to the approach with NPLs, banking supervisors need to make sure banks value the assets correctly or, else, reflect the undervaluation in the P&L account as swiftly as possible.
24. What are your views on the regulation of shadow banking entities?
Non-bank financing provides an alternative to bank funding and helps to support the real economy. Shadow Banking is a source of diversification of credit supply, but it can also become a source of system risk, directly or indirectly through its interconnectedness with banks. It is important, then, to address these risks and to identify appropriate policy measures to avoid them and to guarantee the transparency of shadow banking entities. The more transparent these risks are, the more accurate their pricing will be.
In this sense, much progress has been achieved. The FSB has been working since its inception back in 2009 in transforming shadow banking into resilient market-based finance. Besides, the European Commission issued a communication in 2013 outlining a number of priorities, such as transparency of the shadow banking sector and establishment of a framework for money market funds (MMFs). Money market funds provide short-term finance to financial institutions, corporations and governments. On 20th July 2017 Regulation (EU) 2017/1131 of the European Parliament and of the Council, of 14 June 2017, on MMFs entered into force with several measures aimed at reducing the vulnerability to runs of these funds.
In any case, given the relevance of shadow banking for macrofinancial stability, it must continue to be closely monitored.
25. Do you think that the resolution framework is working efficiently, in the light of the Banco Popular, Banca Populare di Vicenza and Veneto Banca cases?
Recent cases have shown that the European resolution framework, established in 2014 through the adoption of the Banking Restructuring and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR), has proven to work efficiently.
A case in point has been the recent resolution of Banco Popular last June. On 6 June 2017, following the ECB’s determination that the sixth largest bank in Spain was failing or likely to fail, the Single Resolution Board (SRB) managed to adopt a resolution scheme (which was endorsed by the European Commission and implemented by FROB, the Spanish Executive Resolution Authority) and executed the sale of the group to a viable purchaser. In doing so, it fulfilled its mandate to protect financial stability, ensure critical functions and avoid the use of taxpayers’ money. On the morning of June 7, Banco Popular’s offices opened for business as usual without a single cent of public money being spent and with no repercussion on financial markets and the general public, despite the use by the resolution authority of its extraordinary powers to write-down and convert shares, AT1 and T2 instruments.
This first experience of resolution under the banking union has been followed by other cases in Italy in which authorities across Europe have also worked and cooperated closely in applying EU regulation.
On 23 June 2017, the ECB declared Banca Popolare di Vicenza and Veneto Banca as failing or likely to fail and the SRB decided that resolution action was not warranted in the public interest for these banks. As a result, the banks were wound up under Italian insolvency proceedings.
Lastly, the most recent cases of the ABLV in Latvia and its subsidiary in Luxembourg could also be mentioned. They were declared failing or likely to fail on 23 February and will be wound up under national law.
Despite the huge progress made in the construction of the Banking Union, there are lessons to be learnt from these cases. First, insolvency frameworks can be further harmonized, since they are the alternative to resolution, which on the contrary is executed under a common EU framework. Second, there is also a need to strengthen resolution framework in order to handle liquidity-driven crisis, ideally through instruments and procedures that should be simple, quick and sufficiently credible. Work must also continue in bolstering the resolution planning process, not least though the determination and monitoring of MREL for all entities (always taking into consideration the particular circumstances of each group), the design of resolution strategies or a greater emphasis on the collection of timely and updated information. The reform of the BRRD underway provides a window opportunity to incorporate certain key elements into the current system and ultimately make the European resolution framework even more strengthened and robust.
25. What are your views on the possible steps towards the completion of the Banking Union with a European Deposit Guarantee Scheme and a fiscal backstop, including the necessary implementation of existing Banking Union legislation and the ongoing work with regard to risk sharing and risk reduction?
Completing the Banking Union is, together with the Capital Markets Union, a priority for the Economic and Monetary Union. In the absence of fiscal risk sharing, the financial union becomes all the more important to absorb shocks. Furthermore, establishing a level-playing field for banks in the Banking Union will contribute to financial stability and a smooth transmission of monetary policy.
As mentioned above, since the crisis, substantial reforms have already been implemented with an overhaul of banking regulation and the set-up of the Single Supervisory and Single Resolution Mechanisms. As a result, banks are today better capitalised and substantially more resilient, with improved solvency, liquidity and leverage ratios.
In June 2016 the Council of the EU agreed on a roadmap to complete the Banking Union. This roadmap includes measures to reduce and to share risks in the banking sector. Work is currently ongoing to explore the most appropriate sequencing for these measures and to operationalise this roadmap, as requested by the Euro Summit in 2017. Member States should decide to which extent risk reduction and risk sharing measures should proceed in parallel or should be sequenced.
Substantial progress is being made on the measures for risk reduction envisaged in the roadmap with the Commission legislative proposals of November 2016, of which two elements (creditor hierarchy and IFRS 9) have already been fast-tracked. Negotiations are proceeding with the other elements of this package. Non-performing loans (NPLs) remain the main challenge in the EU banking sector. There is a need to deal with the legacies of the crisis and to prevent the future build-up of NPLs.
The assessment by the European Commission, shared by other institutions, is that risks in the banking sector have been substantially reduced and that it is now time to move forward in delivering the two missing elements of the Banking Union: the European Deposit Insurance System (EDIS) and the common backstop to the Single Resolution Fund (SRF).
EDIS is the third pillar of the banking union, and as such it is the most significant gap in its architecture. A fully-fledged deposit insurance scheme would ensure a level-playing field in the Banking Union and promote greater financial integration. Now that supervision and resolution of banks have been centralised, giving depositors the same guarantee independently of their location would balance responsibility and liability in the Banking Union. In an effort to seek consensus, the Commission has proposed a pragmatic way forward, with a gradual introduction of EDIS. In this revised proposal, the first phase of reinsurance does not entail any risk sharing and this should facilitate its swift introduction
Regarding the common backstop to the SRF, there already is a political agreement to introduce it at the latest by the end of the transitional period. The roadmap envisages the possibility of making it operational before then, conditional on progress on risk reduction measures. There is broad agreement that the European Stability Mechanism would be a suitable provider. Swift progress in the common backstop is important for the credibility of the Single Resolution Mechanism.
There is currently an excellent window of opportunity to build a fully-fledged Banking Union that ensures a level-playing field for European banks and increases their resilience ahead a future crises to come. Risk reduction measures will help build the necessary consensus to make progress with risk sharing. At the same time, measures that share risks also contribute to their reduction. Member States face the challenge of deciding on the most appropriate sequencing. At the end of the process, a fully-fledged Banking Union will help preserve financial stability and as a consequence will contribute to a smooth transmission of the monetary policy.
26. What is still missing to deepen the EMU?
When the euro area was created, the assumption was that price stability together with prudent fiscal policies coordinated through the Stability and Growth Pact would ensure macroeconomic stability in the monetary union. There were insufficient mechanisms to prevent divergences in competitiveness that led to the build-up of unsustainable imbalances in the euro area, financed mainly with short term debt.
When these imbalances unwound, individual euro area members lacked the exchange rate as an adjustment mechanism. Rigidities in labour and product markets led to a substantial cost in terms of employment and output. In addition, financial fragmentation in the euro area and fears of redenomination impaired the transmission mechanism of the single monetary policy, so that financing conditions for economic agents were determined by the country in which they were located.
While the reforms implemented during the crisis have significantly improved the resilience of the EMU but more needs to be done if the EMU is to be adequately prepared for the next crisis. Deepening the EMU entails reforming its architecture to increase its resilience and provide it with the necessary mechanisms to, in a first instance, prevent shocks and then, in a second instance, adjust to them when they occur.
Crisis prevention entails the reduction of risks in the monetary union. First, in the financial sector, where substantial reforms have already been implemented,. Second, in Member States’ economies, where there is a need to ensure their resilience through appropriate structural reforms that prevent divergences in competitiveness. Structural reforms are the main risk reduction mechanism in the EMU. In addition to promoting real convergence, structural reforms will unlock potential growth and support sustainable jobs and economic growth.
However, even if full convergence were reached, the euro area would be unable to prevent all macroeconomic shocks. Therefore, crisis management tools are needed as well.
The financial union can promote private sector risk sharing. In order to promote financial integration, both the Capital Markets and the Banking Union are needed. A common backstop for the Single Resolution Fund and a European Deposit Insurance Scheme are needed in order to benefit from a fully-fledged Banking Union (see previous question).
In addition, there are growing calls to set up a macroeconomic stabilization capacity for the euro area to help counter severe shocks that overwhelm national automatic stabilisers. Proponents envisage it as a complement to national fiscal stabilisers in the event of a severe adverse shock. It could also be used to support the implementation of an appropriate fiscal stance, thereby contributing to an appropriate policy mix in the euro area and reducing the overreliance on the monetary policy for stabilization. Should this stabilization capacity be implemented, its design should take due account of moral hazard concerns and provide incentives for sound economic policies, including sustainable public finances or the implementation of structural reforms that ensures greater real convergence and increases the resiliency of individual economies.
Finally, strengthening the ESM, as described below, would reinforce the EMU’s ability to preserve financial stability.
All these reforms will lead to a closer integration of euro area economies that will call for transfers of sovereignty. These transfers of sovereignty need to be accompanied by appropriate democratic accountability, with an enhanced role for national and the European Parliaments.
27. How do you see the challenge for the ECB if the European Stability Mechanism (ESM) was to be transformed in a European Monetary Fund (EMF)?
Since its creation in 2012, the European Stability Mechanism has played a crucial role in safeguarding the financial stability of the euro area. Together with its predecessor, the EFSF (established in 2010), it has provided financial assistance to five Member States. Five years down the road, leaders have given a clear mandate to discuss the future of the institution. There is a window of opportunity to develop a complete safety net for the euro area. Europe should have the capacity and instruments necessary to manage its crises, while at the same time remaining open to the participation of the IMF.
From a purely institutional perspective, the ESM belongs to the EU framework. This would strengthen its democratic accountability. However, if this requires a change in the Treaties, negotiations could be protracted. In the meantime, the opportunity should not be lost to strengthen and reinforce the institution, with a view to incorporating it in the community framework in due course. The ESM, as a crisis management institution, should be adequately equipped to fulfill its role.
There appears to be broad agreement that the ESM would be a suitable provider of the common backstop to the Single Resolution Fund.
The ESM is also expected to play a stronger role in financial assistance programs in the future, notably in program design and monitoring in cooperation with the Commission.
Regarding its interaction with the ECB, we should first of all bear in mind that the ECB and the ESM have different mandates. The ECB’s main objective is to ensure price stability in the euro area, whereas the ESM is a fiscal institution responsible for preserving financial stability in the euro area by providing financial support subject to conditionality to euro area countries. These mandates are complementary: while price stability is a necessary condition for financial stability, at the same time financial stability helps the smooth transmission of monetary policy. A reinforced ESM better equipped to preserve financial stability should therefore be supportive for the ECB to be able to fulfill its mandate.
As a final point, the ESM is not expected to become a monetary institution. Although its similarities with the role of the International Monetary Fund may be understood, it might be advisable to avoid any possible confusion in the future by renaming it as a European Monetary Fund. There are plenty of alternative names that could describe appropriately the nature of this institution, but it will be up to Member States to make a final decision.
28. What are your views on the need to ensure a strict separation between monetary policy and banking supervision and what are in your view the reforms that would enhance and favour such separation? What is your view on the current institutional set-up of the ESRB under the roof of the ECB with regard to its concrete achievements in macro-prudential oversight?
The current set-up appears to be working well. The assumption by the ECB of competences in the supervision of credit institutions has been addressed in a way that fully respects its independence in carrying out its monetary policy functions. When the ECB was conferred the prudential supervision of credit institutions in 2014 it was perceived that the ECB, as the euro area’s central bank, was well placed to carry out these new tasks due to its extensive expertise in macroeconomic and financial stability issues. Indeed many Member States’ central banks are also responsible for banking supervision.
In order to ensure a strict separation between both competences, a thorough legal framework was adopted (SSM Regulation, Decision of the ECB on the separation between the monetary policy and the supervision functions, creation of the Mediation Panel, amendments to the Internal Rules, rules on confidentiality on exchange of information and professional secrecy) so that each of these policy functions was exercised in accordance with its particular objectives. Moreover, the ECB’s internal organization ensures that the staff members involved in carrying out supervisory tasks are organisationally separated from the members involved in the other tasks and subject to separate reporting lines. New procedures to guarantee an agile and independent process in the adoption of supervision decisions have also been set up for the SSM matters (i.e, non-objection procedure). And finally, as accountability is concerned, the ECB is required to report to the European Parliament and to the Council on how it complies with the separation of both functions. There might be room for further fine-tuning in some areas such as the functioning of the shared services within the ECB or the decision making process, but overall the system is working well within the current legal framework. In any case, a effective separation between the monetary policy and supervisory functions should not prevent the reaping, wherever possible and desirable, of all the benefits to be expected as a result of combining these two policy functions in the same institution.
As far as the ESRB is concerned, it has been working smoothly since its inception. A significant part of its success is the result of the ECB support at all levels. Macroprudential policy is a key issue for a central bank and therefore the ECB should go on with its leadership in the ESRB. The ESRB is a generally well-functioning body that does not call for major policy changes but for targeted fine-tuning of its structure. However, its current structure and composition reflects the institutional framework at the time of its set-up, which has greatly evolved since then. One of the major developments has been the put in place of the Single Supervisory Mechanism and the Single Resolution Mechanism. Cooperation between ESRB and these institutions should be reinforced, given the potential relevance of their task for macroprudential policy.
29. What are your views regarding the structural reform of the banking sector as regards ‘too-big or interconnected to fail’ institutions?
The Financial Stability Board, in close cooperation with the Basel Committee of Banking Supervisors, has already developed a set of criteria to determine the global systemic importance of banks. Under these criteria, there are currently thirty credit institutions grouped in five buckets (although the fifth bucket is currently empty) according to their specific degree of global systemic importance, with increasing total loss-absorbing capacity (TLAC) requirements. On top of that, the EU Capital Requirements Directive contains a set of criteria to define other systemically important institutions (i.e. banks whose failure could have systemic consequences on financial stability and the real economy of one or various Member States), which are also subject to a capital surcharge. Finally, under the Bank Recovery and Resolution Directive, Minimum Requirement for own funds and Eligible Liabilities (MREL) requirements are meant to be set also taking into account the size and complexity of the bank.
The TLAC and MREL requirements are a significant step forward towards being able to deal with the too-big-to-fail problems. It aims at ensuring effective and credible application of the bail-in resolution tool, avoiding the use of taxpayers’ money.
D. Functioning of the ECB and democratic accountability and transparency
30. What will be your personal approach of the social dialogue at the ECB?
ECB Staff issues and its employment policy are becoming more visible lately. As the role of the ECB widens, certain human resource management matters become increasingly relevant in the context of the ECB social dialogue. In my opinion, it would be very positive to further enhance cooperation with staff representatives and trade unions to work together to continue improving on matters such as: the resourcing model, preserving high working quality standards and post-employment benefits. Based on principles such as transparency, partnership and mutual respect, the social dialogue could bring about concrete improvements for everyone. Staff representatives should be timely informed and consulted on all the issues that are relevant to them. Besides, at ESCB/Euro system level, the ECB maintains a fruitful dialogue with staff representatives that should be preserved on those areas where decisions from the ECB’s decision-making bodies may have an impact on employment conditions in the central banks.
31. What conclusions do you draw from the comparison between the transparency policies followed by the ECB and the other main central banks (Federal Reserve, Bank of England ,....)?
Transparency and good communication are today crucial to the conduct of monetary policy, to convey policy-relevant information to financial markets and the public, so that the direction of monetary policy can be well understood and anticipated. Better public understanding makes monetary policy more credible and effective. Last, but not least, transparency is one of the cornerstones of good governance.
The transparency policies followed by the Federal Reserve (Fed) and the Bank of England (BoE) on one side, and by the ECB on the other side, are necessarily different because of the different nature of such institutions, as well as the diverse context, challenges and determinants they face. One of such relevant aspects is the complexity of the multinational nature of the Eurosystem compared to other monetary policy authorities. However, this does not mean that transparency standards of the ECB are lower than their peers’. On the contrary, ECB transparency standards have quickly and strongly increased lately. The substantial efforts made by the ECB in the recent years to reinforce its transparency should be recognized. The publication of the accounts of monetary policy meetings and the disclosure of agendas are only some examples. In this sense, the reiterated and firm commitment by the ECB to reviewing, adjusting and updating its transparency framework is certainly paramount and should be supported.
32. What is your view on the accountability of the ECB to the European Parliament, and the necessary steps to enhance it, especially in the context of the quarterly monetary dialogues with the ECON Committee? What measures and future reforms would in your view reinforce the democratic accountability of the ECB towards the European Parliament?
Accountability ensures that the ECB acts in line with its mandate. It is the necessary counterweight for independence, which is essential for the ECB to be able to pursue such mandate free of any interference. The ECB was given its mandate directly by the EU citizens at the occasion of the ratification of the Treaties and therefore, from a democratic perspective, the ECB is accountable for its action towards EU citizens and their directly elected representatives, present here at the European Parliament.
The ECB has developed a solid and comprehensive accountability framework over the years. The President’s quarterly hearings here at the ECON Committee, the many and diverse questions the MEPs send to the ECB regarding its core policies and activities, the hearings of other Executive Board members on specific topics, the publication and presentation of the ECB annual report as well as the follow-up on the related European Parliament Resolution, the frequent exchange of views between the EP President and the ECB President and the many accountability requirements contained in the SSM Regulation are just examples that prove the depth and meaningfulness of the accountability relationship of the ECB towards the European Parliament.
In this context, the quarterly Monetary Dialogue is an essential tool for granting transparency to monetary policy decisions taken by the ECB towards the EU citizens and their representatives, especially in times when decisions, such as forward guidance or the exit strategy from unconventional monetary policy, are facing increased scrutiny. I believe that the high current level of interaction proves that this is a very useful exercise in which neither MEPs shy away from asking critical questions, nor the ECB representatives avoid providing as much insight and rationale as possible. Additionally, topics chosen by the ECON Committee and background analysis on the topics thanks to briefing papers prepared by monetary experts beforehand provide a focus point to hearings that allow MEPs to engage with the ECB in much broader discussions about economic policy in general.
As with other EU policies, the EP provides fundamental checks and balances that needs to be preserved and ensured. Going forward, the accountability framework should remain efficient and adapted to the new needs and challenges, by expanding interactions as necessary. In the case of the monetary dialogue, those interactions should aim at ensuring that the ECB’s strategy is well understood, adequately targeted and successfully and efficiently implemented. This could be complemented with dedicated themed sub-sessions on specific topics, allowing deeper analysis and discussion on areas of particular interest. In short, the relationship between the ECB and the European Parliament, its key counterpart in terms of accountability, needs to remain close and solid.
33. What do you see as the most important risks and challenges facing the ECB in the current juncture?
In spite of the extraordinary non-standard measures deployed in recent years, euro area inflation is still projected to fall short of the 2% reference rate for several years to come. This state of affairs justifies a continuous reassessment of the economic and monetary conditions of the euro area and of the effects of the measures deployed so far. In the meantime, the ECB must also be vigilant about any eventual undue build-up of financial risks in the current environment of very low interest rates and loose monetary and financial conditions.
Looking ahead, some important challenges remain for monetary policy in the euro area. Some will be faced relatively soon, while others are of a more long-term nature. In the short run, and to the extent that inflation shows a sustained adjustment towards its aim, the ECB will need to assess how it will normalize its monetary policy stance. This involves both the asset purchases under the APP as well as the deposit facility rate, currently in negative levels. Going forward, adjustments in the path of net asset purchases will have to be linked to the progress made in the convergence of inflation towards its aim. Once net purchases are terminated, normalization can proceed by raising the deposit facility rate and the other policy rates.
In addition to the challenges posed by the current environment of low inflation and the need to eventually normalize the stance of monetary policy, in the longer run monetary policy faces a rather formidable challenge, related to the fact that interest rates are likely to remain very low in the future. In particular, the evidence suggests that the so-called natural interest rate, has declined in recent years in advanced economies, and could be now close to zero or even negative. Regardless of the reasons behind this (demographic, technological, etc.), such low natural rates pose significant difficulties for conventional interest rate policy.
In these circumstances, it seems that some of the recent measures, such as asset purchase programs or forward guidance on short-term interest rates, will remain in central banks’ toolkit, as they have proved to be helpful at reducing long-term rates when short-term rates are stuck at their effective lower bound. However, these policies have their limitations too. Therefore, a more fundamental reflection about potential adjustments in the monetary policy strategy may be necessary. Yet, while any change in monetary policy strategy is a responsibility of central banks, it is worthwhile to remember that monetary policy is mostly powerless at raising natural real interest rates. The latter are largely determined by real factors, such as demographics and technological progress. As a result, the responsibility of raising natural rates lies with other policy areas, such as fiscal policy and, especially, structural reforms. Thus, while monetary policy has achieved much in recent years, it is only through a concerted effort of all economic policy-makers that we will be able to guarantee a period of high and stable economic growth cum price stability in the euro area.
34. Following a recent report from the EU Ombudsman and the European Parliament recommendations contained in the latest report on the ECB adopted in February 2018, what are your views on:
1) the need to publish declarations of financial interests for its Governing Council members in order to prevent conflicts of interest,
2) the need to ensure a two year professional abstention for outgoing ECB Governing Council Members,
3) that the Members of the Executive Board should in principle abstain from being simultaneous members of forums or other organisations which include executives from banks supervised by the ECB;
The ECB is an institution entrusted with tasks serving the public interest and it is therefore of utmost importance that the highest ethical standards are required to all its staff but particularly to its decision-making bodies members in order to avoid any potential conflict of interest and ensure the highest possible level of integrity, competence, efficiency and transparency.
Regarding the request of publication of declarations of financial interests, I agree with any measure that enhances transparency and accountability in public institutions such as the ECB, since that is a necessary condition for its independence. Indeed, I am already subject to such a requirement as member of the Spanish Government, and I am compelled to disclose any financial or private interests both before assuming the Ministry and after resigning it.
On abstention periods, I am not personally against this sort of cooling- off period in order to avoid possible conflicts of interest. In fact, the Spanish legislation (Ley 3/2015, de 30 de marzo, reguladora del ejercicio del alto cargo de la Administración General del Estado), that I must honour, thoroughly regulates professional and wage incompatibilities during and after a period of public service as senior official.
Regarding the latter question, the Members of the Executive Board of the ECB must be in touch with the reality and the real economy in order to be fully aware of the opinions, doubts, and worries of the actors of the system. That can be achieved in different ways, although not all of them are appropriate to prevent possible conflicts of interest.
35. What is your assessment of the involvement of the ECB in the context of financial assistance programmes? How do you see evolving in future a potential ECB involvement in financial assistance programmes?
The participation of the ECB in the financial assistance programmes, as it is now laid down in the Two-Pack Regulation and the ESM Treaty, has been sometimes challenged, but I believe it can be argued that was necessary in critical moments. Anyhow, such participation must be understood in a context of time pressure, market stress, incomplete information, very little experience with large adjustments within a monetary union and the lack of an adequate and precise legal framework to deal with crises.
In this scenario, the ECB involvement, as foreseen in the applicable secondary legislation, was confined basically to providing advice and expertise on a range of issues relevant for the proper functioning of the monetary policy, the financial stability and the support to the general economic policies of the Union. The ECB (together with the European Commission and the IMF) provided input to the Eurogroup and the ESM Board of Governors, who was the only decision-making body.
Despite of this role, and while the full independence of the ECB was retained, there have been some concerns and misgivings about a potential ECB’s interference in matters of national sovereignty and/or about the potential conflicts of interests, and this is why I believe that the future role of the ECB with regard to financial assistance programmes will remain basically a mere advisory role in the field of surveillance and programme assessment..
From now on, dealing with future crises will be much more favourable thanks to a more robust and comprehensive crisis management framework, which include the Bank Recovery and Resolution Directive (BRRD), and the still incomplete Banking Union, which definitely will help to minimise the need to involve the ECB.
36. What could the ECB concretely do to have female candidates for ECB top positions in the future and enhance overall gender diversity in the ECB?
Gender diversity is a matter of uttermost importance, and our main institutions must set an example for the rest of the society. Therefore, it is important that the ECB, as well as other private and public entities, promote women to their highest positions. In that sense, the ECB will have to elect four new Board members in the coming two years. All the members who are concluding their mandates are men, so we have an excellent chance ahead to give way to a more gender-balanced Board and to progress towards gender equality.
The ECB is already working to ensure gender diversity by supporting a diverse and inclusive work environment as well as by setting specific targets of women in managerial positions. However, further progress should be pursued particularly in managerial positions, and addressing the glass ceiling will remain important in the coming years.
37. How do you see possible improvements for the ECB’s accountability vis-à-vis the ECA in terms of its operational efficiency?
As a result of ECB’s independence, the ECA’s mandate is limited to the assessment of the operational efficiency of the management of the ECB, as foreseen under Article 287 of the Treaty on the Functioning of the European Union. This aims at keeping a balance between ensuring a sound financial management of public funds and adequate reporting to citizens, on the one hand, and the insulation of the ECB decision-making from any short-term political pressure, which is a pre-condition for the ECB to adequately pursue its mandate. In any case, the ECB’s readiness to collaborate and respond to ECA’s recommendations in the recent past is a positive step, as is its commitment to further adapt its accountability framework to future challenges.
38. What do you think about the fact that the Council in the past once ignored the opinion of the EP regarding the appointment of a board member?
According to the Treaty of the Europeean Union (article 283), the president, the vice president and the other four members of the Executive Board of the European Central Bank shall be appointed by the European Council on a recommendation from the Council, after it has consulted the European Parliament and the Governing Council of the ECB. That is, the responsibility to select the members of the Board lays exclusively on the Council.
Therefore, when the Council takes a decision not concurrent with the opinion expressed by the EP, it does not mean that it has ignored that opinion. It means that, after having analysed and evaluated it, the Council still has decided otherwise.
Regarding the specific case mentioned in the question, the opinion of the EP never called into question the candidate’s credentials but only pointed out that he was not a woman.
39. How do you personally intend to improve gender balance within the ECB?
As said in question #36, gender balance is a priority for me not only for equality reasons, but also as a condition for economic efficiency. There is ample evidence that diversity and inclusiveness are a driving force for performance and gender balance is a way to promote diversity. That is why we all should work within our capacities and responsibilities to remove any obstacles for women to thrive in the professional world.
If I am elected vice president I will keep supporting this principle as I have done in the past, as the appointments I am responsible for show: Six of the eight high rank positions in the Ministry of Economy are held by women, including all three Secretaries of State, the Secretary General for the Treasury, and the Secretary General for Industry and SMEs.
PROCEDURE – COMMITTEE RESPONSIBLE
Appointment of the Vice-President of the European Central Bank
N8-0053/2018 – C8-0040/2018 – 2018/0804(NLE)
Date of consultation / request for consent
Date announced in plenary
Discussed in committee
Result of final vote
Members present for the final vote
Burkhard Balz, Hugues Bayet, Pervenche Berès, Udo Bullmann, David Coburn, Esther de Lange, Markus Ferber, Jonás Fernández, Neena Gill, Roberto Gualtieri, Brian Hayes, Gunnar Hökmark, Danuta Maria Hübner, Cătălin Sorin Ivan, Petr Ježek, Wolf Klinz, Georgios Kyrtsos, Philippe Lamberts, Werner Langen, Bernd Lucke, Olle Ludvigsson, Gabriel Mato, Costas Mavrides, Bernard Monot, Caroline Nagtegaal, Luděk Niedermayer, Stanisław Ożóg, Dimitrios Papadimoulis, Dariusz Rosati, Pirkko Ruohonen-Lerner, Anne Sander, Alfred Sant, Molly Scott Cato, Pedro Silva Pereira, Theodor Dumitru Stolojan, Kay Swinburne, Ramon Tremosa i Balcells, Ernest Urtasun, Marco Valli, Tom Vandenkendelaere, Jakob von Weizsäcker
Substitutes present for the final vote
Enrique Calvet Chambon, Jan Keller, Verónica Lope Fontagné, Paloma López Bermejo, Thomas Mann, Michel Reimon, Tibor Szanyi, Romana Tomc, Miguel Urbán Crespo, Roberts Zīle
Substitutes under Rule 200(2) present for the final vote
Zbigniew Kuźmiuk, Edouard Martin, José Ignacio Salafranca Sánchez-Neyra