ECB Draghi: Relationship of financial fragmentation and monetary policy & the Eurosystem’s collateral framework
He mostly spoke about the ‘relationship of financial fragmentation and monetary policy’ and the ‘Eurosystem’s collateral framework’.
Assessing the current economic situation in the euroarea, he said that the expectation for moderate recovery in 2015 and 2016 is still
intact even though the euroarea growth momentum has weakened in the recent past months. Geopolitical risks and insufficient progress in structural reforms in euro area constitute major downside risk to the economic outlook.
Turning his focus on financial fragmentation, he said it has been a major obstacle to the smooth conduct and transmission
of monetary policy. “We still face a situation where our very accommodative monetary policy stance does not sufficiently reach some final borrowers in the euro area.”
Monetary policy alone cannot solve this problem, he added. To overcome these obstacles “determined structural reforms on the side of national governments to improve the business environment and setting incentives to invest, with the aim to boost productivity, create new jobs and raise the growth potential of the economy” is required.
He specified the two objectives of the collateral framework of the Eurosystem:
- First to protect the Eurosystem from incurring losses, as it is explicitly required by the Statute of the ECB/ESCB;
- Second to ensure that Eurosystem credit operations can be carried out smoothly by making sufficient collateral available.
He said that the Eurosystem collateral framework has been quite complex since the very beginning. It had to take into account the various national banking systems and financial markets and a common standard had to be found which embraces the respective national characteristics, while at the same time ensuring that sufficient collateral is available. All this have added to the complexity of the system.
He added, “Therefore a challenge going forward is to make the collateral framework simpler and more transparent, without impacting the ability of counterparties to access our refinancing operations.”
Concluding his speech he said, “There is an urgent need to agree on concrete short-term commitments for structural reforms in the Member States, on a consequent application of the Stability and Growth Pact, on the aggregate fiscal stance for the euro area, on a strategy for investment, and to launch work on a long-term vision to further share sovereignty ensuring the sustainable and smooth functioning of EMU.”
All rights reserved Economics Monitor 2014