FRANKFURT (MNI) – A spurt of ECB Governing Council member comments
following the President Jean-Claude Trichet’s press conference on
Thursday corroborate the impression he gave that policymakers are more
concerned about the health of the banking system than the immediate
economic outlook.
Nevertheless, the comments also show that there are some worries
about the potentially adverse effects of keeping non-conventional
measures in place for too long, suggesting that the members who opposed
yesterday’s decision for unchanged accommodation had pushed for an
earlier exit.
On Thursday evening and Friday, Council members made reassurances
that while growth will certainly slow in the second half the Eurozone is
in no risk of falling back into recession. Echoing comments by Trichet,
they dismissed concerns that weak U.S. growth could hit the common
currency area harder than previously expected.
Ewald Nowotny told Market News on Thursday that he does “not see a
perspective of a double dip.” Rather, “I think that we have a very clear
growth perspective.” Nowotny also noted that the “very pessimistic”
outlook for the U.S. economy “may be overblown.”
Nout Wellink told MNI that despite the fact “the weak spot in the
whole picture is the United States,” we are not only getting weak but
also positive signals from across the Atlantic. In any event, the
Eurozone’s fortunes have become increasingly dependent on Asia, Wellink
noted, citing the strength of European exports to China and other
countries in the region.
For the Eurozone, “the third quarter should be okay”, Wellink
asserted, adding that talk of a double dip is both irritating and
irrelevant.
Mario Draghi observed that the growth pickup is becoming
increasingly self-sustaining. “The recovery is becoming more broad-based
now — Germany’s consumption and investment are growing as well. Now,
the recovery is there and is spreading to the rest of Europe,” he said.
Nevertheless, Council members also warned that it is too early to
declare victory, that the recovery process remains fraught with risks
over the medium term. In particular, they pointed to the ongoing
weakness in the Eurozone’s banking system as well as the potentially
negative effects prolonged support by the central bank could have.
Nowotny noted that a number of Eurozone banks are still dependent
on ECB financing. “This clearly is an unwelcome situation and the ECB is
pressing to change it,” he said. However, he also suggested that the
central bank’s hands are largely tied in this respect. “The way to
change it rests mainly with national governments, because this is always
a very specific situation that cannot be dealt with using general
monetary policy.”
ECB Executive Board member Jose Manuel Gonzalez-Paramo, however,
hinted that the central bank might have to remove some of its support to
force commercial banks and governments into reform and recapitalization
efforts.
“The danger exists that the support offered to the financial system
at a time of stress morphs into a lasting dependence of banks on central
bank financing, blunting incentives for necessary structural change in
the financial sector,” he warned.
He, like Nowotny, said that “a number of banks have become addicted
to central bank liquidity” and that “this is a danger that has to be
addressed by central banks.”
Those comments, as well previous remarks by Axel Weber calling for
a big debate on the exit in the first quarter, suggest that there is
some push for further normalization. In conjunction with Trichet’s
admission that there had been disagreement on Thursday’s decision about
how to proceed with liquidity supply, they suggest that some Council
members called for an earlier exit yesterday.
The actual decision by the Governing Council to extend full support
into next year despite a significant improvement in money markets,
however, suggests that the central bank will continue to tread very
carefully in withdrawing support as long as some banks still depend on
the ECB’s life-line.
In this context, Gonzalez-Paramo’s comments appear to be more a
general note of caution than an action plan. “We long to be back to a
stable and normal framework and to phase out non-conventional,
extraordinary measures, but the speed of this exit, this phasing out,
will depend on the situation of markets,” he said, hedging his earlier
remarks.
Most likely this is also the way the latest comments on rates move
are to be read. Wellink said that while the ECB’s current monetary
policy stance is well known, Europe “should try to normalize the
situation. Otherwise we are building up problems for the future two to
three years from now.”
Nowotny, however, assured that “for the time being, as we see now,
there is nothing in sight that could cause us to increase interest
rates. Of course we also emphasize that we never pre-commit, but for the
time being, we don’t see any specific signs for interest rate changes.”
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com
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