Papademos, vice-president ECB: economie zal zich geleidelijk herstellen in 2010 (en)

Economic activity will remain weak in the euro area this year, with a gradual recovery in 2010, while inflation "may reach negative levels around mid-year" without this implying a protracted period of deflation, ECB Vice President Lucas Papademos told MEPs on Tuesday.

Mr Papademos warned that uncertainty about growth prospects "remains unusually high".  As for future inflation, while the price index might dip into negative territory, this would be a temporary phenomenon, and not "an episode of deflation" or period of protracted decline in prices.  Inflation was expected to rise in 2010, though staying below 2 per cent.

ECB already in "non-standard mode"

Regarding the ECB's stance, Mr Papademos stressed that "the ECB has taken forceful action in its liquidity management, also through non-conventional measures" since the onset of financial market tensions. "Our policy-making has been in a 'non-standard mode' for a considerable period of time."  He noted that since June 2007, the balance sheet of the European System of Central Banks had expanded by €600 billion.  But the "medium term orientation" of the ECB's monetary policy "will allow us to pursue a credible exit strategy" when the situation normalises and exceptional policy measures are no longer appropriate.

With "emerging signs of a negative feedback loop between the real economy and the banking sector," Mr Papademos said it was still too early to assess the overall impact of government support for the banks.

Need for well defined role and powers for European Systemic Risk Council

The ECB, he said, welcomed the proposals in the de Larosière report for the creation of a European Systemic Risk Council (ESRC) under ECB auspices tasked with macro-prudential supervision: i.e. helping to prevent future economic crisis by monitoring risks to financial stability.  He stressed it would need to have well defined, close links with banking supervisory authorities, especially to ensure it had access to information about financial institutions and their "inter-connectedness". There would also need to be "adequate institutional mechanisms" to ensure its warnings and recommendations were acted upon.  This would require the ESRC to have a solid legal basis.

Responding to Committee Chair Pervenche Berès (PES, FR), Mr Papademos said he favoured the use of EU Treaty Article 105 (6), which allows the Council to give additional tasks to the ECB, for the creation of the new ESRC.  The core to ensuring its warning were acted upon was a "good and effective interplay with micro-supervisors and with governments via the Council,"  he said.  He assured Margarita Starkeviciute (ALDE, LT) that the ESRC would include all the EU's central bank governors, and that it would not be focused purely on the euro area.

Interest rate policy in 2008

Elisa Ferreira i (PES, PT) asked whether the ECB had taken too short-term a view in raising interest rates in July 2008 when the market turbulence was already underway.  Mr Papademos stressed the high levels of inflation risk at the time and, in particular, that the events of September 2008 had led to "significant and abrupt changes" in economic conditions - and the bank had therefore adjusted its policy stance.

Support beyond the euro area

Zsolt László Becsey i (EPP-ED, HU) asked what the ECB could do to help non-euro zone countries.  Mr Papademos stressed that the ECB's liquidity support for euro area banks was already helping to prevent greater reductions in credit availability from their branches and subsidiaries in non-euro countries. In addition, the ECB was providing euro liquidity to some non-eurozone central banks to address pressures in money markets. 

Securitisation - 5 per cent retention?

Ieke van den Burg i (PES, NL) asked for the ECB's view on the issue of securitisation (when banks make loans to customers then sell on the debt as an investment product).  Mr Papademos said he supported the Commission's proposal for loan originators to be obliged to retain 5 per cent of the value of such loans on their own books as a way of ensuring they have an interest in the quality of the loan - a higher level of retention would probably not bring greater alignment of incentives given the limitations he saw in this approach's effectiveness.

21/04/2009

In the chair : Pervenche Berès (PES, FR)