ECB Officials See Time Short for Euro Area to Overcome Fragility

  • Praet, Knot, Linde and Villeroy speak at conference in Madrid
  • Urgency for reforms mount as monetary stimulus nears limits

European Central Bank policy makers called on governments to coordinate their strategies to solidify the region’s fragile economy and counter rising populist opposition to deeper integration.

“The time for reforms is short, the window is narrow,” Executive Board member Peter Praet said at an Institute of International Finance meeting in Madrid on Wednesday. “We have to regain, explain -- and that’s the main challenge for policy makers -- that coordination is key for future growth and prosperity.”

Praet’s comments echoed similar sentiment from Governing Council members Luis Maria Linde, Francois Villeroy de Galhau and Klaas Knot at the conference, which took place eight days before the ECB’s June 2 meeting. One major point of discussion at the previous policy-setting session in April was whether a lack of economic reforms by governments is undermining the central bank’s ability to hit its inflation goal.

“Monetary policy cannot be a substitute for economic policy coordination or the lack of reforms,” said Villeroy, the French central-bank chief. “For the euro area, for its citizens, 2016-2017 is the decisive time to act.”

Stimulus Limits

Linde, the Bank of Spain governor, said the region’s policies should be “better exploited.” Knot, who heads the Dutch central bank, said monetary stimulus is reaching its limit and suggested a mix of measures that could be taken.

ECB officials are concerned that a failure to hit their inflation target for more than three years risks undermining their credibility. The rate was minus 0.2 percent last month, compared with a goal of just under 2 percent. The ECB’s quiet period on monetary-policy comments starts Thursday, a week before they meet in Vienna.

Villeroy said central bankers need to be involved in the broad discussion about economic policy, though decisions must be taken by political leaders. The Frenchman called for reforms at a national level -- “including mine” -- and a “full coordination of national policies” that could include a fiscal expansion in countries such as Germany.

Political Resistance

Even so, the Governing Council members noted the political resistance to deeper European integration, both in the 19-nation euro area and the larger European Union.

“Two elements in particular seem controversial to both politicians and the general public,” said Knot. “One is a further transfer of national sovereignty to Brussels. The other is a further increase in public risk-sharing.”

German criticism of ECB policies has escalated in recent months, with Finance Minister Wolfgang Schaeuble saying they have stoked support for populist parties. A preliminary deal to ease Greece’s debt burden, agreed by euro-area finance ministers early Wednesday morning, threatens to revive anger in some nations including Germany and the Netherlands that have grown weary of helping the Greeks.

The U.K. will hold a June 23 referendum on whether to stay in the EU. Spaniards will be heading to the polls for the second time in six months on June 26, with the incumbent People’s Party seen winning the election but falling short of a majority with anti-austerity group Podemos gaining support.

Insufficient Urgency

The ECB officials outlined cases for the structure of a more integrated euro area. While Villeroy reiterated a call for a euro-area Treasury and finance minister, Knot suggested that interim steps might be taken sooner. He suggested five “no-regret” options: simplifying EU budgetary and economic-imbalance rules; strengthening the internal market; a sovereign-debt restructuring mechanism; regulating sovereign exposures on bank balance sheets; and encouraging private risk-sharing.

“Leaps forward in European integration are hard to conceive at this moment,” he said. “A combination of smaller measures could still form a gradual but decisive step forward.”

Praet said European governments are showing an insufficient sense of urgency with regard to reforms. The ECB’s extraordinary stimulus measures won’t support the business cycle indefinitely and politicians must use the time to agree on “a clear roadmap on what we want to achieve” for economic and monetary union, so that it can be incorporated into the strategy of European institutions, he said.

“We need to make the case for stronger governance of the euro area,” Villeroy said. “We cannot afford another missed opportunity and we have to act swiftly.”

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