ECB keen to act amid Europe’s fragility

Lisbon / Bloomberg

European Central Bank (ECB) officials underlined their readiness to further ease monetary policy as banking, political and sovereign fault lines showed the region remains vulnerable six years after the start of the debt crisis.
In Frankfurt, the ECB’s home city, and Brussels, Europe’s nominal capital, policy makers said they’ll take whatever measures are required to help the economy and boost inflation. Speaking in Lisbon, President Mario Draghi said he still has plenty of tools at his disposal — though elsewhere his colleagues stressed that doesn’t include the financing of fiscal stimulus, known as ‘helicopter money’.
“We face uncertainty about the outlook for the global economy,” Draghi wrote in the central bank’s annual report. “We face continued disinflationary forces. And we face questions about the direction of Europe and its resilience to new shocks. In that environment, our commitment to our mandate will continue to be an anchor of confidence for the people of Europe.”
Since the ECB cut rates last month to record lows and expanded its bond-buying programme, Governing Council members have repeatedly emphasised that the central bank hasn’t run out of room to ease again.
“If further adverse shocks were to materialise, our measures could be recalibrated once more, commensurate with the strength of the headwind, also taking into account possible side-effects,” ECB Chief Economist Peter Praet said in Frankfurt. Constancio said in Brussels that the central bank will do “whatever is needed.”
The Stoxx Europe 600 Index rose 0.7 percent to 330.22 on Friday in Frankfurt, trimming a fourth weekly loss, its longest streak since October 2014. The euro traded unchanged at $1.1378.

Spanish Bonds
The yield on Spanish 10-year bonds fell three basis points to 1.58 percent. The securities fell for six days, the longest run since a nine-day losing streak through July 24, 2012. That was two days before Draghi’s pledge to do “whatever it takes” to preserve the euro. Spanish politicians have yet to form a government since an inconclusive election, and the acting administration missed its 2015 budget-deficit goal. The losses in peripheral debt are coming even after the ECB expanded its monthly bond-buying program, which tends to support such securities.
“Growth in Europe has slowed a bit due to effects from the market turmoil in the beginning of the year, and also the uncertainty over Brexit,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The latter is of course especially UK, but it creates uncertainty for all of Europe.”

Helicopter Tussle
In Frankfurt, ECB policy makers stopped short of saying what additional tools they would consider. Academics and officials at the “ECB and its Watchers” conference tussled on the topic of helicopter money, without consensus on the definition of the term emerging. Charles Bean, a former Bank of England deputy governor, said it’s just a mix of two existing policies, namely central bank stimulus coupled with looser fiscal policies.
“It seems to me that the whole discussion about helicopter money is mistakenly thinking that there are some additional policy instruments out there, some magic tool that we can use which has not yet been tried,” Bean said.
The concept, first popularised by theorist Milton Friedman more than 40 years ago, has come to the fore as central banks seek more and more extreme options to ward off deflation. It aims to transmit cash as directly as possible to the economy, bypassing usual intermediaries such as banks.
ECB is the central bank for the euro and administers monetary policy of the Eurozone, which consists of 19 EU member states and is one of the largest currency areas in the world. It is one of the world’s most important central banks and is one of the seven institutions of the European Union (EU) listed in the Treaty on European Union (TEU). The capital stock of the bank is owned by the central banks of all 28 EU member states.