ECB’s Demetriades Says OMT Program Is Decisive Step Forward
European Central Bank Governing Council member Panicos Demetriades comments on the sovereign debt crisis, the ECB’s new bond-buying program and the euro-area economy.
Demetriades, who heads the Central Bank of Cyprus, spoke in an interview in Nicosia yesterday.
On the unlimited nature of the ECB’s Outright Monetary Transactions:
“A central bank has this wonderful ability that no other player in the market has when it says ’I’m going to do whatever it takes,’ and everyone believes that. In the end they may do nothing. It restores confidence. It’s the idea of multiple equilibria, and when we know that we are in the good equilibrium, in the end action is not needed.
“Once people know that we stand ready to do it, no one will speculate against the unlimited firepower of a central bank. This is what stabilizes currencies of countries where investors know that they have that power. One wouldn’t gamble against the Federal Reserve.”
On the sterilization debate:
“There is the decision that these transactions will be sterilized. I think that discussion is overrated. I don’t think that in the current circumstances there are any risks to inflation, and in the current circumstances even if the ECB were not able to sterilize I don’t think it would make any significant difference.”
On the debt crisis:
“The OMT program that was announced last week is a major step, a very decisive step forward towards addressing the problems that arose in the last year or two. I think that the program itself is focused at removing the market distortions that essentially threatened the very viability of the currency. It will certainly help to reduce and remove those risks that are associated with events that the ECB considers unacceptable.”
On growth in the euro area:
“The way forward in terms of growth is first of all to restore confidence in the euro zone, and in itself the OMT program is going to do a lot to achieve that. So the ECB certainly is doing whatever it can to safeguard the euro. And that in itself is going to lay the foundations of growth.
“Now when it comes to the fiscal policy mix, I think there has been so far too much emphasis on austerity and not enough on growth policies. Although fiscal consolidation is necessary, it is not necessarily the best way forward to have deep cuts in public expenditure when economies are struggling for growth. I think the pace of this consolidation, the pace of austerity, the pace of these cuts, should really be such that it doesn’t create additional recession, so that it doesn’t plunge economies into deep recession. We have seen plenty of examples that, when economies are in deep recession fiscal consolidation programs go off track. It is important to have the right fiscal policy mix. We need to ring fence, for example, investment expenditures, R&D expenditures that actually underpin long-term growth. That is particularly important and that isn’t emphasized enough.”
On the interest-rate outlook:
“As you know, at the ECB we never pre-commit. Of course, there are downside risks now, and when it comes to next month’s decision we take on board all the developments and decide accordingly.
“I don’t think we are technically ready for negative deposit rates, but I don’t see that, in theory at least, as an obstacle.”
On the ECB’s new supervisory powers:
“I am comfortable with it. In fact, we are not just comfortable, but we have actually contributed to the debate and we welcome it. The banking union concept itself is good. What we need to do in the euro area is decouple sovereign risk from bank risk. For countries like Cyprus with large banking systems, it is particularly important.
“A central bank has to have powers. That’s critical for monetary union. I don’t see that as a danger. We want more European integration and that’s the way forward.”
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