The European Central Bank council should count itself fortunate that the highly respected Bundesbank President, Axel Weber is a member. Weber, an economist by training and head of Germany’s ‘central’ bank since 2004 is given to talking a great deal of sense. Weber’s view is that a one percent floor on ECB rates should be firmly placed and announced following a likely further 0.25 per cent cut widely expected at the next ECB meeting due on 7 May. Announcing a 1 per cent floor would at the very least provide Euro member commercial banks and other lenders with sufficient confidence to plan ahead with some degree of certainty. While the problems faced by US, Euro and many other nations that have been dragged in may differ in extent most agree that improving the health of commercial banks, the provision of sufficient short and long term liquidity availability and confidence so that they might kick start lending between themselves and subsequently, to business and consumer alike, remains at the heart of the current crisis. The rest of the twenty-two strong ECB council should take Weber’s words of wisdom to heart. Not only is the influential German representative seeking to put a firm floor on rates though as he also favours that the current basis of ‘unlimited’ ECB liquidity provision to banks should be extended from the current six month maturity basis to at least one year and maybe even longer than that. Once again, this makes considerable sense.
Clearly, not all member states agree that putting a floor on ECB rates at 1 per cent is sensible but somehow these must be persuaded. At the heart of the various internal bickerings within the current ECB council debate lies the difficulty of achieving agreement not only on future interest rate movement but also agreeing a refinancing package for delivery next month that includes a plan to purchase debt. Importantly the hope will be that the ECB also comes up with something that can really benefit the weaker Euro member economies too and that reduces the domestic political pressure on them. That may be even harder to achieve. On the interest rate floor debate Weber is mainly concerned that if benchmark ECB rates are brought too close to overnight rate this reduces incentive of banks to lend to each other. Clearly this has to be seen as a very sensible argument though achieving agreement on this within such a disparate council made up of ‘central’ bank chiefs from Euro based countries small and large and rich and poor will be equally hard.
With sixteen member states having adopted the Euro since the currency was introduced in 1999 this next month really is crunch time not only for the currency but also the ECB in my view. Central to the issue is how dominant economies such as Germany and France and the representatives of these on the ECB council take to heart the sufferings of smaller Euro member nations such as Portugal, Slovakia and Slovenia. Indeed, right now, we cannot even be sure that the Germans and French even agree. The voices of Spain, Ireland and Italy and that do not have the financial strength and power of France and Germany will also be heard.
Time is running out. Whilst there appears to be a slowing of economic decline in the US and even a touch more confidence amongst none Euro member states despite a host of other problems they might yet have to solve there is as yet no sign that the rot of decline in the Euroland economy has yet slowed.
Thus it is crucial that the ECB provides a firm lead in May on which all Euro member states can agree and work within. OK, so what we are talking about here is the stuff of dreams but increasingly the future of the Euro itself and of confidence that international investors have in the ECB economy and currency is dependent on seeing the ECB providing a jolt. After ten years in existence we should by now be able to view with confidence that the ECB is sufficiently established to provide the confidence that the rest of the world craves. Right now we just can’t do that.
Whilst agreeing that the UK, Denmark and Sweden as leading EU members had been right to stay out of the Euro it is true to say that through its ten year history I have generally agreed the cautious stance taken by the ECB. Until recent events, development of the Euro economy over the past ten years has been both slow but also sure and very sound. This was right but we are now in 2009 facing a very different set of consequences and events. Of necessity in my view the ECB must now come out of the closet and provide sufficient economic leadership to bring the EU economy out of the current mess. This will mean stepping up the amount of risk that it takes. Sure, that the majority, well at least half, of Euro members have been innocent bystanders in this crisis of confidence does require that the ECB takes due heed of their respective needs. For these nations, this should not be a simple case of ‘you made your bed [joining the Euro] so lie on it’. Moreover it is that the ECB must take responsibility for providing sufficient special assistance to help them see their way through. Playing the blame game and joining in calls for substantial regulatory change may be right in essence but right now it is not what the ECB should see as first priority albeit that by providing views does at least provide part confidence that it accepts its own system has failed.
What no Euro member needs now is to see the ECB and the council of members playing a game of bowls whilst the enemy – recession is not only at the door but rife amongst all member states. Until now I have avoided any criticism of how the ECB has behaved through this crisis and for just a few more weeks, at least until the package of measures promised is finally announced, I will stick to that policy. But, if the ECB fails to give a precise lead then and one that might begin to take this vast and important area away from deepening recession and also one that can be agreed and worked by all Euro member states then it won’t only be me that turns on their hands. Indeed, this is now such a crucial decision time for Euroland that failure now might even bring down the whole pack of cards. Over to you M. Trichet!
