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The Eurosystem – Challenges and Perspectives Warwick Economic Summit University of Warwick

The Eurosystem – Challenges and Perspectives Warwick Economic Summit University of Warwick 14 February 2009 Ewald Nowotny Governor of the Oesterreichische Nationalbank (Austrian central bank) www.oenb.at. Forecasts for EU and Euro Area Countries. Challenges for Monetary Policy I.

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The Eurosystem – Challenges and Perspectives Warwick Economic Summit University of Warwick

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  1. The Eurosystem –Challenges and Perspectives Warwick Economic Summit University of Warwick 14 February 2009 Ewald Nowotny Governor of the Oesterreichische Nationalbank (Austrian central bank) www.oenb.at

  2. Forecasts for EU and Euro Area Countries

  3. Challenges for Monetary Policy I • In contrast to the last few years: No trade-off between short-run developments in inflation and output. • In the current crisis, inflation and output are behaving like after a demand shock. Both are dropping significantly. • Thus, the policy response is straightforward: decrease policy rates.

  4. Challenges for Monetary Policy II • Policy interest rates have decreased worldwide. However… • slow effect on the real economy • the pass-through to bank lending rates might be hampered because of the financial crisis • a too-swift decrease of policy rates might signal panic • what happens when the zero lower bound is reached • difficulties in the implementation of monetary policy…

  5. Challenges for Monetary Policy Implementation • Persisting tensions in global money markets… • Counterparty risks • Liquidity risks • … led to • volatile overnight rates • high term interest rate spreads • declining volumes, signs of rationing • Money markets crucial for the • implementation of monetary policy • derivative markets, interest rates for households and firms

  6. ECB Liquidity Management: Stability within the Turmoil • Key challenge: Distribution of liquidity in the system when interbank lending is impaired • Pre-crisis ECB framework: • Large group of banks admitted to regular tender operations and standing facilities • Broad range of collateral • Weekly and three-month open market operations • No need for special facilities. • Alleviate strains in term funding markets by increasing term funding.

  7. After the Collapse of Lehman Brothers • Unprecedented level of stress in financial and in particular interbank markets. • Flexible reaction • Full allotment in tender operations • Wider range of eligible collateral • Temporarily significant involvement in intermediation • Alleviate stress in global markets • Stepped-up cooperation between central banks • Unlimited access to US dollars for euro area banks • Overall: Operational framework has passed the test well, has provided a maximum of continuity

  8. 51 years after the signature of the Treaty of Rome, the euro remains one of the most tangible signs of Europe’s determination to forge a common future and work together to secure peace and prosperity for our continent. • José Manuel Barroso – June 2008 • Moreover, the crisis shows that there is more to the euro than its role as a means of transaction…

  9. The Euro Has Indeed Become a Global Player

  10. The Benefits of the Euro in the Financial Crisis The euro protects Europe • EMU shows that in turbulent financial waters, it is better to be on a large, solid and steady ship rather than on a small vessel. • Businesses were sheltered from exchange rate volatility. No competitive devaluations. With the single currency, Europe has been able to act swiftly, decisively and coherently • Would it have been possible to protect separate currencies fromthe fallout without the euro? European authorities, parliaments, and central banks reacted immediately Europe has shown that it is capable of taking decisions • The crisis has improved popularity of the EU. People are more convinced of the achievements and institutions of EU and EMU.

  11. Future Challenges for EMU and the Euro In the short run • Maintain price stability • Return to the path of growth and stability in Europe, stimulate employment and create jobs • Overcome the financial crisis – maintain financial stability • Redesign regulatory and institutional frameworks In the medium to long run • Cope with globalisation • EU: implement the Stability and Growth Pact firmly and credibly, render economies more productive, innovative, avoid competitive divergences, stimulate scientific and technological progress • Address ageing population • Handle euro area enlargement optimally – increase from 11 members in 1999 to 16 members in 2009 • Strengthen the euro area’s international role and the euro’s image

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