ECB Overload

The Tired Superhero

Mario Draghi needs help keeping the euro zone afloat.
  • Why it matters

    Why it matters

    The ECB is running out of options to prop up the euro-zone economy. Without help from governments, the Continent could falter once again.

  • Facts


    • The 19-nation euro zone grew by 0.3 per cent in the final quarter of 2015, while consumer prices fell 0.1 percent in March.
    • The ECB has pushed its main refinancing rate to zero and its deposit rate into negative territory at -0.4 percent.
    • The ECB launched a series of new “unconventional” measures in March, including buying corporate bonds, but many experts warn the central bank is fast running out of tools.
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Central bankers aren’t supposed to show much emotion. In normal times, theirs is a relatively bland job of keeping the economy running smoothly behind the scenes, setting interest rates and staying out of the public limelight.

Tell that to the European Central Bank, the Frankfurt institution that watches over the 19-nation euro zone. Over the past few years, the ECB and its president, Mario Draghi, have seen its job description morph from a behind-the-scenes monetary manager to Europe’s go-to crisis fighter – and since last year the currency zone’s new banking supervisor too.

The fissures from the weight of expectations on the ECB’s shoulders are starting to show. During a normally-staid central banking conference in Frankfurt on Thursday, two of the central bank’s leading voices uncharacteristically lost their cool in defending their institution from attacks and unrealistic expectations.

“The shooting at the ECB is sometimes difficult to swallow,” Peter Praet, the central bank’s chief economist and a Belgian national, told the conference hosted by Goethe University’s Center for Financial Studies.

Mr. Praet singled out German economists who accuse the ECB of making money “worthless” by reducing interest rates to zero and below: “Thank you, I’ll take it,” Mr. Praet retorted.

“This is a team sport. Everybody needs to be on the field. Right now there’s only one player on the field,” “Monetary policy is the only game in town.””

Catherine Mann, Chief economist, OECD

Eight years after the financial crisis, the euro zone is still in an economic funk, even if growth has picked up a little over the past year. Banks are struggling to remain profitable and lend to businesses, while companies seem loathe to borrow and are hoarding cash rather than expanding operations.

While the Federal Reserve in the United States is quietly going back to a simpler, conventional central banking role – it raised interest rates in December for the first time since the 2008 financial crisis – the European Central Bank remains very much the zone’s premier fighter of crises that just don’t seem to go away.

Depending who you ask, the ECB has done too much or too little, and has too much or not enough power, to pull the struggling Continent out of its doldrums.

Either way, the ECB and its directors are appearing to get tired of the scrutiny.

“Many of the issues we have been discussing this morning should never have come across the desk of the ECB,” Benoit Coeure, an executive board member at the ECB focusing on financial markets, sighed after an hour-long debate at the conference. He said he was tired of spending nights at E.U. summits in Brussels – government summits the ECB should never be attending in the first place.

With each crisis that Europe has faced, governments have also looked to the central bank for help in areas that aren’t typical for a central banker. The ECB has monitored bail-out programs, provided emergency loans to keep Greek banks afloat, and has stepped in to prop up governments like Greece, whose own political leaders seem to be unable to solve their own problems.

Behind these frustrations lies a serious and more immediate worry for Europe’s monetary policy guardian: The ECB is reaching the limit of what it can do to keep the euro zone’s economy afloat. It has lowered the zone’s benchmark borrowing rates not just to zero, but into negative territory — effectively emptying the quiver of its monetary policy tools.

“Monetary policy cannot be left in isolation. We have to keep the discussions going with all the policymakers that are in this very imperfect union to which we belong,” said Ignazio Visco, governor of Italy’s central bank and a member of the ECB’s rate-setting governing council.


Peter Praet, the ECB’s chief economist, has had it up to here. Source: Bert Bostelmann for Handelsblatt.


In mid-March, the central bank pulled some of its last possible strings. It cut its primary interest rate to zero and lowered the deposit rate it charges banks that park their reserves at the ECB further into negative territory to -0.4 percent. It also said it would start buying corporate bonds as part of a €1.5 trillion heavy quantitative easing package.

Many of these moves have come in for criticism, especially in Germany and among bankers who complain that the ECB’s actions are making it harder for the financial sector to turn a profit. The constant criticisim in Germany, which hosts the ECB in Frankfurt at a glittering skyscraper on the edge of the city, is starting to put some ECB executives on the defensive.

The ECB’s bottom line has been this: Without making money readily available, the smaller, more struggling countries on the edge of the currency zone could slip further into trouble, in the process undermining the single currency. That philosophy hasn’t gone down well in Germany, the zone’s most prosperous member, where conservative savers are fed up with the lack of interest income.

“A less accommodative monetary policy would be harmful to everyone,” Mr. Visco argued. That includes the banking sector, he insisted.

One thing both critics and supporters of the ECB can agree on is that the central bank has become overburdened. It’s time for somebody else to take center-stage.

“This is a team sport. Everybody needs to be on the field. Right now there’s only one player on the field,” said Catherine Mann, chief economist of the OECD. “Monetary policy is the only game in town,” she added.

Who are the other missing players? Some point to Europe’s banks, many of which remain mired in restructurings and struggling to write off hundreds of billions in bad loans still left over from the financial crisis.

“Many of the issues we have been discussing this morning should never have come on the desk of the ECB.”

Benoit Coeure, ECB Executive Board member

Hyun Shin, chief economist at the Bank for International Settlements, for example, suggested banks should reduce the dividends they pay shareholders and plow the money back into their own institutions instead. He pointed to a BIS study that found banks passed about 43 percent of their earnings on to shareholders between 2007 and 2014.

Keeping the money, and raising banks’ capital reserves in the process, could encourage them to lend more to businesses, Mr. Shin argued.

For the ECB’s Mr. Coeure and others, the focus should shift to governments. The European Union needs to get its budgetary house in order, needs more public investment and more structural reforms to ease the burden on businesses and raise the Continent’s long-term growth prospects.

“Low potential growth in Europe is a threat to our social compact,” Mr. Coeure said. Everything else is a “sideshow,” he argued, including the ECB’s unconventional monetary policy that has been the center of so much attention.

078 ECB-01 Mario Draghi WTB 2014 resume


Thursday was hardly the first time that the central bank sought to shift more of the burden for rescuing Europe onto governments, which many central bankers complain have been far too content to let the ECB fight the Continent’s fires by itself.

The ECB has long argued that all it can do is buy time for governments to act. Now that this time may be running out and the ECB’s room to maneuver may be dwindling, Europe’s central bankers are beginning to get more urgent and frustrated. And rightly so.

“I don’t think there’s anything wrong with central banks being much more vocal,” Paul Sheard, the chief economist of rating agency Standard and Poor’s, told Handelsblatt Global Edition.

Mr. Sheard argued that Europe’s governments urgently need to start cooperating more closely on fiscal matters, and even consider some form of joint fiscal stimulus to take the burden off the central banks.

“Monetary policy is not a very good tool to manage aggregate demand. The question is: would fiscal policy do better?” Mr. Sheard said.

That’s easier said than done. Mr. Sheard acknowledges that coordination among euro zone governments is not easy.

“You have an agent of monetary policy managing the euro zone, but the agents of fiscal policy are managing 19 different countries,” he said.

Until that changes, the ECB may remain in the firing line for a while.


Christopher Cermak is an editor with Handelsblatt Global Edition in Berlin, covering finance and economies. To contact the author:

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