Coene Says ECB’s ‘Nuclear Deterrent’ Should Ideally Stay UnusedJeff Black
European Central Bank Governing Council member Luc Coene said he would prefer the ECB’s as-yet-untapped bond-buying program to stay that way.
“The ideal situation would be for the OMT never to be used,” Coene said in an interview at the World Economic Forum in Davos, Switzerland, on Jan. 26, referring to the Outright Monetary Transactions program. “It’s like a nuclear deterrent. Whenever you use it, that will raise new questions and new issues,” such as the risk that governments would then ease off austerity measures, he said.
No country has yet asked for a bailout that could trigger bond buying by the ECB after President Mario Draghi’s rescue plan, announced in July, ended a wave of panic in euro-region debt markets. Countries have so far balked at asking for aid because any assistance from the ECB would require them to sign up to a program of reform and potentially more austerity.
Coene, who heads Belgium’s central bank, said it’s now up to governments to generate growth in the euro area as the debt crisis shows signs of receding. The ECB “cannot solve the underlying problems,” he said.
“There is only so much a central bank can do,” said Coene, 65. “Governments can make the adjustments that are needed to make the economy grow again. We are going to hear that message this year again and again. The next move won’t be from the ECB.”
The 17-nation euro area will see a “shallow” recovery starting this year as long as leaders don’t hesitate on the implementation of measures to reduce debt and increase competitiveness, Coene said.
“The way to generate growth now is by strengthening confidence,” he said. “Companies are not investing and consumers are not spending because they are afraid. You can only get out of this loop if policy makers do not give the impression that they are wavering again.”
If governments follow through on their promises in the coming months, underlying momentum could mean the ECB will revise its prediction that the euro-area economy will contract by 0.3 percent this year, Coene said.
“When you look at the latest indicators in Germany, they point to a stronger underlying base of activity than was assumed,” he said. “If there is any adjustment to happen, it will be a small adjustment, and probably rather on the upside than the downside.”
Banks’ plans to repay 137.2 billion euros ($184.7 billion) of three-year loans to the ECB this week should be “interpreted positively” because it shows they feel more confident about the future than they did a year ago, Coene said.
This, combined with cautious optimism that an economic recovery will materialize later this year, means “the general view on the council is that the situation is improving,” he said.
At the same time, there’s “absolutely no talk” of winding down any of the central bank’s emergency policy measures, he said. “We’re not out of the woods yet.”
Coene dismissed talk of a currency war, saying aggressive further policy easing by central banks would be required for such a scenario to become a possibility, and that the Bank of Japan’s latest moves are not aimed directly at weakening the yen.
“Of course you cannot ignore the consequence that the exchange rate will go down, but we are not yet there,” he said of Japan. “There is no currency war yet. A ghost has been evoked here, but too early. When monetary policy is made even more accommodating in an aggressive way, that could end up in a currency war. But we are far from that.”