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Economic and monetary developments in 2011
In the earlier part of the year, the economic recovery in the euro area continued, supported by global growth and strengthening domestic demand. As of mid-July, tensions in financial markets again intensified, fuelled mainly by market participants’ concerns about the evolution of public finances in several euro area countries. The resulting tighter financial conditions and rapidly deteriorating economic confidence, together with lower global demand, dampened euro area economic activity in the second half of 2011. As financial market tensions adversely affected the monetary policy transmission mechanism, the Governing Council also adopted a range of non-standard monetary policy measures as of August 2011. In December, the Governing Council adopted additional enhanced credit support measures, including the conduct of two longer-term refinancing operations with a three-year maturity, increased collateral availability and a reduction in the reserve ratio to 1 per cent. The main purpose of these measures was to address the short-term funding needs of the euro area banking sector to mitigate the effects of strains in financial markets on the supply of credit to households and businesses.
Fiscal policies, bond markets and economic governance
In order to restore credibility, several euro area countries, including the most affected, implemented bold fiscal consolidation and structural reform measures, and strengthened their budgetary frameworks in 2011. A key feature of the euro area government bond markets in 2011 was the diverging development in yields across countries mainly as a consequence of the markets’ perceptions of the individual countries’ fiscal fundamentals. The actions of Central Banks to support liquidity in the global financial system contributed to ease tensions in the sovereign debt markets.
Finally, progress has been accomplished to reinforce the economic governance framework of EMU – both as regards crisis prevention and crisis resolution. The EU rules guiding the design and implementation of national fiscal policies have been strengthened as well as in the legal frameworks of Member States. A new macro-economic surveillance framework has been created. The new provisions included in the elements for EU fiscal governance framework are important steps in the right direction.
Financial sector issues
With the introduction of the CRD IV/CRR, the European Union will be among the first to implement the Basel III framework, a cornerstone development for strengthening financial stability. As the CRD IV is advancing towards finalisation, the ECB strongly supports the establishment of a single European rulebook for financial institutions - mitigating regulatory arbitrage and competitive distortions - which at the same time allows for flexibility at national level by Member States to apply more stringent prudential requirements where systemic risks arise.
The ECB welcomes the recent agreement on EMIR, which will implement the G20 mandate to enhance the safety and resilience of OTC derivatives markets and will establish common EU rules for Central Counterparties and Trade Repositories. At the same time, the ECB sees a continued need for monitoring inconsistencies of EU rules with the global CPSS-IOSCO principles. Finally, there will be a need to address potential divergences in the supervision and oversight of Trade Repositories, given the lack of cooperation with central banks on TRs under EMIR. Moreover, the ECB welcomes the review of the Markets in Financial Instruments Directive and supports the objective pursued in the Commission’s proposal on credit rating agencies. These regulatory initiatives to strengthen the Single Financial Market and its infrastructure will be complemented by an important Eurosystem project, the Target2 Securities, the future IT platform for securities settlement in central bank money.
Moving on to banking crisis management, ECB fully support the Commission’s initiative to introduce an EU bank recovery and resolution framework that should contribute to address current obstacles to the effective crisis management of EU cross-border financial institutions. Another important dimension of the resolution regime refers to the desirable creation of Resolution Funds that would be financed by the financial sector and would play an important role, particularly in resolution of cross-border institutions.