–National EMU Governments Should Use Stable Period To Press Reforms
MADRID (MNI) – Financial market volatility has diminished
significantly in recent months, due both to massive liquidity injections
by the European Central Bank and strong reform efforts by European
leaders, but there is no room for complacency and national governments
must now use the current period of stability to fortify their reform
efforts, ECB Executive Board member Jose Manuel Gonzalez-Paramo said
Monday.
Speaking at a conference in Madrid, Gonzalez-Paramo, whose
eight-year term at the ECB expires after May, noted that when the ECB
launched its 3-year refinancing operations last December, markets were
in the grip of severe volatility and uncertainty.
“Although it is still too early to judge the impact that this
operation will have on markets, on the lending activity of banks and on
the real economy, it cannot be doubted that both the first and second
three-year operations have contributed in an important way to
stabilizing the situation in financial markets,” he said.
Between the two operations, the second of which was on February 29,
the ECB has pumped more than E1 trillion into the banking system.
Other contributing factors abetting the return of relative calm,
Gonzalez-Paramo said, have been the “decisive measures” taken by
political leaders, including: a new inter-governmental treaty that
tighens enforcement of fiscal rules; a reinforcement of the EU’s current
and future bailout funds; the abandonment of a previously accepted
proposal that could have forced fiscally troubled governments in the
future into sovereign defaults; and new momentum for deficit cutting and
structural reform by national governments in the Eurozone.
“However, there is no margin for complacency,” Gonzalez-Paramo
warned. “To the contrary, the relative calm we have achieved with all of
these initiatives will not last if it only serves as a pretext for
national governments to relax their efforts. Governments must take
advantage of this period of relative stability to reinforce their
initiatives to improve European governance and deepen the needed reforms
at a national level, on the financial, labor and fiscal fronts.”
Gonzalez-Paramo rejected as “erroneous” the arguments of some
analysts who have argued the ECB has fractured Eurozone monetary policy
by allowing some of the national central banks to apply their own
distinct criteria in deciding what to accept as collateral in
refinancing operations — and to shoulder the corresponding risks by
themselves rather than distribute it across the Eurosystem.
This policy, he argued, allows different central banks to take
account of the specificities of their own national banking sectors. And
in any event, “these differences are always subject to common criteria,
harmonized and agreed by the whole Eurosystem,” he asserted.
Gonzalez-Paramo also noted that the more flexible collateral
policy, rather than introducing a schism into the banking system, is
actually helping to rectify one that was created not by the ECB but by
the financial crisis. The sovereign debt crisis, he said, has created
significant inequality among national banking sectors with regard to the
availability of collateral that is eligible for refinancing.
“Taking account of this segmentation of the market, created by the
crisis, the ECB is helping reestablish the unity of the monetary policy
that applies to the whole of the Eurozone,” he argued.
The Executive Board member said that in order to have a lasting
solution to the current crisis, it is necessary to separate “to the
extent possible” the fate of banks from the financial situation of their
governments. This will require a rapid and coordinated recapitalization
of national banking sectors, he said.
In order to “cut the roots” of the sovereign debt crisis, the most
affected countries must press ahead with deficit cuts and
growth-inducing structural reforms, he added.
“If the market, in view of the decisions taken on these fronts,
stops mistrusting banks because of their sovereign debt holdings or
their exposures to problematic real [economic] investments, the
segmentation of money markets will surely be reduced enormously,”
Gonzalez-Paramo said. And should that happen, he added, “we would be
able to progressively dismantle the [ECB's] non-conventional measures
which, having been essential as a line of defense, could become
counter-productive if they were to be prolonged longer than necessary.”
[TOPICS: M$$EC$,M$X$$$,MGX$$$,M$$CR$]