The current challenges of the euro area - is the "euro crisis" over?

Размещено на http://www.allbest.ru/

The current challenges of the euro area - is the "euro crisis" over?

J. Schweigl

The last ten years have been filled by numerous extraordinary economic measures at the EU level. The ECB or the whole Eurosystem has been using unconventional monetary policy tools and the European commission aimed at setting up a workable system of financial assistance mechanism (funds). The goal of this paper was to provide a brief over of some of the important measures that were taken in the EU as for the monetary policy of the Eurosystem and the financial assistance mechanisms of the last decade. This overview is accompanied with a brief summarisation of some of the steps that are very likely to take place in 2019 at the EU level both on the monetary and fiscal areas.

Keywords: Euro; euro crisis; Eurosystem; European central bank; monetary policy; quantitative easing; judicial review; Court of Justice of the EU; Treaty on Functioning of the EU; financial assistance funds; European monetary fund.

economic european monetary

The last ten years have been filled by numerous extraordinary economic measures in the EU. When the EU had to deal with the financial crisis spreading from the US housing crash in 2008 and with huge sovereign and foreign debt of some of the euro area countries, there has been discussion whether the measures taken were necessary in order to support the EU economy, transmission mechanism and even the viability of euro, as a single currency. The Eurosystem employed unconventional monetary policy steps and several financial assistance funds were originated. Some of these steps have been praised, some of them rather criticised. Some claim that these measures helped to mitigate the so-called “euro crisis”, some however assert that they were unnecessary and possibly even breaching the primary law of the EU.

The goal of this paper is twofold. First, I present some of the legal and economic aspects both at the fiscal and monetary area. Second, I present a brief overview of what we can be expected at the EU level in the year 2019 as for the core anti-crises measures and legislation.

The Decade of Extraordinary Measures. Monetary Policy Measures

As for the monetary measures taken by the Eurosystem within the last decade, it should be first set clear that the financial structure in the EU differs from that in the US in that commercial banks play an important role in financing the real economy and in transmission mechanism. The bank credit-to-GDP has been increasing steadily (see figure one). The European Systemic Risk board (ESRB) warns that Europe may be “overbanked”1. This reliance on bank credit is to be reduced by increasing the role of capital markets in this respect within the currently-being-shaped framework of capital markets union . This structure thus makes is it more complicate - though not impossible - for the real economy to get financing when the banking sector ability to extend credit mitigates.

Figure 1. Bank loans to GDP (%) in selected EU countries; source World Bank Financial Development and Structure Dataset, In: ESRB, 2014

The primary goal of the ECB is to ensure price stability, as set forth in the Treaty on functioning of the EU (TFEU) and Statute of the European System of Central Banks (ESCB)1. A quantitative definition of price stability was adopted by the ECB's Governing Council as early as in 1998, as “ayear-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%”, so it would be later that in the pursuit of price stability it aims to maintain inflation rates below, but close to, 2% over the medium term .

The Eurosystem's reaction to the evolving critical situation in interbank lending and transmission mechanism may be divided several phases. Between 2008-2010, there was uncertainty among financial and credit institutions caused by increasing liquidity and solvency risks connected with exposures balance sheet exposures of the euro area banks to US housing market. ECB tried to deal with this credit freezing via so-called Enhance credit support, as a set of temporary measures . These measures spanned (i) extension of the maturity of liquidity provision (from three to twelve months), (ii) currency swap agreements (Eurosystem temporarily provided liquidity in foreign currencies, too), (iii) broadening of collateral eligibility requirements (commercial banks were allowed to use a wider range of collateral to obtain liquidity). Aside from that, the First covered bond purchase programme, whose aim was to revive the covered bond market, was tackled .

The seriousness of situation further deepened when at the beginning of 2010 the markets expected a possible Greek sovereign default. Similar challenges also applied to sovereign debt of Italy, Ireland, Portugal and Spain. These difficulties were believed to impair transmission mechanism . In May 2010, the ECB started Securities Markets Programme (SMP), under which it started purchasing mainly sovereign bonds of the most hit countries. As the SMP was not sufficient, other measures had to be taken in the time span 2011-2012. To name a few, two addi-tional ad hoc sets of extension of the maturity of liquidity provision (maturity three years each), reduction in the minimum reserve requirement (from 2% to 1%), additional broadening of the accepted collaterals and launching of Second covered bond purchase programme. These steps were then in 2012 followed by announcement of a special purchase programme Outright monetary transactions (OMT), based on which the Eurosystem central banks were to intervene in the secondary sovereign bond markets in order to safeguard an appropriate monetary policy transmission and the singleness of the monetary policy1. The OMTs were subject to judicial review by the Court of justice of the EU (CJEU), as some economists doubted that the programme complies with the monetary financing ban set forth in the TFEU. In its decision of 16 June 2015 (so-called Gauweiler decision), CJEU ruled that the Eurosystem's direct purchase programmes were in line with the EU law and that “ECB must be interpreted as permitting the ESCB to adopt a programme for the purchase of government bonds on secondary markets, such as the programme announced in the press release. ” Nevertheless, it laid down certain limits that must be observed, such as the requirement that any intervention by the ESCB of the kind provided for by a programme cannot be treated as equivalent to a measure granting financial assistance to a Member State. In other words, not only that the purchases on primary markets are not permitted, but also purchases on secondary markets cannot create certainty for the sovereign bond issuers (and holders) that the bonds be purchased anytime by the Eurosystem .

In the following years, Eurosystem launched several direct purchase programmes, mainly the sector purchase programme (PSPP) . During the net asset

purchase phase, monthly purchases were conducted at average paces of:

- €60 billion from March 2015 until March 2016

- €80 billion from April 2016 until March 2017

- €60 billion from April 2017 to December 2017

- €30 billion from January 2018 to September 2018

- €15 billion from October 2018 to December 20181.

PSPP is currently under judicial review by the CJEU, as the German constitutional court stayed the proceedings concerning PSPP and referred several questions to the CJEU for a preliminary ruling. The subject of the proceeding is a question whether the PSPP for the purchase of public sector securities is compatible with the German Basic Law. The German constitutional court expressed mainly the following doubts about compliance of PSPP with the EU law:

“The PSPP concerns government bonds issued by Member States, state- owned enterprises and other state institutions as well as debt securities issued by European institutions. Even though these bonds are purchased exclusively on the secondary market, several factors indicate that the PSPP decision nevertheless violates Art. 123 AEUV, namely the fact that details of the purchases are announced in a manner that could create a de facto certainty on the markets that issued government bonds will, indeed, be purchased by the Eurosystem; that it is not possible to verify compliance with certain minimum periods between the issuing of debt securities on the primary market and the purchase of the relevant securities on the secondary market; that to date all purchased bonds were - without exception - held until maturity; and furthermore that the purchases include bonds that carry a negative yield from the outset. ”

So far no decision has been made, yet. The further development of the monetary policy of ECB is outlined below, in the sub-chapter Measures in the Years to Come.

Financial Assistance Funds

Aside from the monetary policy measures, there were some steps taken at the fiscal level. These steps consisted in creation of several mechanisms/funds, sometimes called financial assistance or rescue funds, whose role would be to provide financing to the states facing financial difficulties, such as expensive fi- nancing or even a lack of access to financial markets. Establishing these mechanisms was, nevertheless, not a new idea. Such mechanisms had been created even before mainly with respect to balance of payments deficits1.

Following the 2008-2009 events and the problems Greece fact in early 2010, there were first established the European Financial Stabilisation Mechanism (EFSM) and European Financial Stability Facility (EFSF). Both of these mechanism were established only as temporary ad hoc solutions. EFSM served as an additional tool of funding that the European Commission (EC) was allowed to use. EC could raise up to €60 billion in the capital market . EC was entitled to issue bonds guaranteed by the European communities. These bonds were guaranteed by the EU budget, thus they seemed to be 100% safe. EFSM provided assistance to Ireland, Portugal and Greece . This mechanism was established by means of the Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism, i.e. it originated within the legal framework of the EU.

EFSF, one the other hand, was established outside of the EU framework. There was established a joint stock company under the laws of the Grand Duchy of Luxembourg (sociйtй anonyme), with which the participating states concluded a treaty. This fund provided assistance to Ireland, Portugal and mainly to Greece . EFSF was empowered to raise funds through the issuance of its bonds on capital markets. Although these bonds were not guaranteed by the EU budget, as it was with respect to EFSM, these bonds were also considered very safe from the capital requirements perspective1.

Next, there was established a first “permanent” financial assistance fund, which, however, also originated out of the legal framework of the EU. The fund has been titled European Stability Mechanism (ESM) and was established based on an international treaty among the euro area countries. The treaty was signed in February 2012 and entered into force in September 2012. The ESM itself was inaugurated in October 2012, following ratification of the ESM Treaty by the then 17 euro area countries . From the legal perspective, ESM is a financial institution (organisation) which was established by a treaty of euro area countries, but not being a part of the EU framework. ESM is entitled to issue money market instruments and medium and long-term debt with maturities of up to 30 years, regularly nominated in euro. The maximum lending capacity is €500 billion, subscribed capital is nearly €705 billion, paid-in capital nearly €80.5 billion . The ESM provided assistance to Greece, Ireland, Spain, Portugal and Cyprus. ESM is not the only fund providing new assistance, the previous two mechanism still exist, but do not engage in new credit extension.

Measures in the Years to Come

In this part, I will outline some of the events that are very likely to happen in 2019 as for the monetary policy of the Eurosystem and the financial assistance funds.

In several announcements, the Governing council of ECB presented its intentions for in 2019. It expects the key ECB interest rates to remain at their present levels at least through the summer of 2019. This also means that one of the key rates, the deposit facility will remain below zero where it has been since 2014. In other words, commercial banks will be charged for the excessive reserves.

Regarding non-standard monetary policy measures, ECB announced that it would stop with the PSPP by the end of 2018. Nevertheless, the Governing council intends to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation .

An important event will also be a selection of new President of the ECB, as Mario Dragi's term ends in 2019. It is still not clear who will be the next head of ECB, although some prospects have been already discussed1. We can also expect that the CJEU will deliver its decision on the PSPP's compliance with the EU law.

As for the financial assistance funds, there is planned an establishment of a new permanent fund which is to be a part of the EU legal framework. The fund is to be called a European Monetary Fund (EMF) and should replace the existing ESM. In other words, it should draw the functions and role of the ESM into the EU structure. The EMF should continue to provide financial stability support to EMF member states. EC believes that as a part of the EU legal framework, the decision-making within the EMF should be faster and more effective than that of ESM. Aside from its function in the field of financial assistance, the fund should also provide the common backstop for the Single resolution fund, which is a fund to which commercial banks have to contribute in the euro area countries.

The overall lending capacity of EMF should be no less than €500 billion. The initial authorised capital stock of EMF shall be nearly €705 billion. The EU budget should not be held liable for the expenses or losses of the EMF. EC already published a proposal of a regulation by means of which the EMF should be established.

Conclusion

The goal of this paper was to provide a brief over of some of the important measures that were taken in the EU as for the monetary policy of the Eurosystem and the financial assistance mechanisms (funds) of the last decade. Aside from that, I tried to summarize some of the steps that are very likely to take place in 2019 as for these two areas.

The last decade was rather exceptional. The ECB or the whole Eurosystem has gained experience with using some unconventional tools. Although some of these measures are being left now, or at least limited in their extent, some remain in force, such the negative deposit facility rate. The gradual development in the area of financial assistance funds seems to be put on more serious and firm grounds by creation of EMF.

The anti-crisis measures are only one thing though. The EU should now focus on shaping more sustainable system as for the functioning of the single currency. One of the first steps should be to form a clear vision as for more harmonised fiscal policy. Paying more emphasis to the Maastricht convergence criteria should be one of the first directions to look.

References

1.Bank for International Settlements, Risk Weight for the ESM and EFSF. In: Bank for International Settlements web. 18.3.2014: https ://www.bis.org/publ/bcbs_nl17.htm

2.DELIVORIAS, Angelos. Covered bonds - ripe for expension? In: EPRS analysis, PE 545-713. 2015: http://www.europarl.europa.eu/Reg-

3.Data/etudes/BRIE/2015/545713/EPRS_BRI(2015)545713_REV1_EN.pdf DELIVORIAS, Angelos. Monetary Policy of the European Central Bank; In-depth analysis. In: European Parliamentary Research Service. PE 549-005. 2015:http://www. europarl.europa. eu/Reg-

4.Data/etudes/IDAN/2015/549005/EPRS_IDA(2015)549005_EN.pdf

5.EFSF, Financial Statements Management Report and Auditor's Report as at 31 December 2017, p. 7: https://www.esm.europa.eu/sites/de-

6.fault/files/20180627_efsf_financial_statements_2017.pdf

7.European Commission, Action plan on Building Capital markets union, COM(2015)468 final: https://eur-lex.europa.eu/legal-

8.content/EN/TXT/?uri=CELEX%3A52015DC0468

9.European Commission, Mid-term review of the capital markets union action plan, 2017: https://ec.europa.eu/info/publications/mid-term-review-capital-

10.markets-union-action-plan_en

11.European Systemic Risk board, Is Europe Overbanked? In: Reports of the Advisory Scientific Committee No 4/June 2014: https ://www. esrb. europa. eu/pub/pdf/asc/Reports_ASC_4_1406.pdf

12.SCHWEIGL, Johan a Jin BLAZEK. Monetary Policy in the Twenty-First Century. In Michal Radvan, Jolanta Gliniecka, Tomasz Sowinski, Petr Mrkyvka. The Financial Law Towards Challenges of the XXI Century. Brno: Masarykova univerzita, Pravnicka fakulta, 2017. p. 86-96, 11 p. ISBN 978-80-210-8516-9. doi:10.5817/CZ.MUNI.P210-8516-2017.

13.SCHWEIGL, Johan. Monetary Financing Ban in the EU Law. In Petr Mrkyvka, Jolanta Gliniecka, Eva Tomaskova, Edward Juchniewicz, Tomasz Sowinski, Michal Radvan. The Challenges of Local Government Financing in the Light of the European Union Regional Policy. 2018.Brno: Masarykova univerzita, 2018. p. 593-601, 9 p. ISBN 978-80-210-9087-3

14.TRIDIMAS, P. Takis and XANTHOULIS, Napoleon, A Legal Analysis of the Gauweiler Case: Between Monetary Policy and Constitutional Conflict (January 1, 2016). Takis Tridimas - Napoleon Xanthoulis, «A Legal Analysis of the Gauweiler Case», in Federico Fabbrini (ed), «The European Court of Justice, the European Central Bank and the Supremacy of EU Law» Special Issue (2016) 23 Maastricht Journal of European & Comparative Law 1: https://ssrn.com/abstract=2733728.

Размещено на Allbest.ru