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Fixing the monetary transmission mechanism and the elimination of tail risks
The Outright Monetary Transactions (OMT) initiative was the innovative instrument that we deployed to remove break-up fears from the market pricing of sovereign credit risk, and promote more regular financial conditions. The initiative proved an extremely effective instrument. It has not only reduced the fraction of sovereign spreads that reflected compensation for the redenomination fears, but also contributed more generally to the improvement in funding conditions for corporates, banks and individuals across the euro area.
Non-standard measures by the ECB have helped ease liquidity pressures for the euro area in general, and continue to play a pivotal role in alleviating funding constraints for Portuguese banks in particular. And we have seen consistent signs that banks in Portugal – again, more visibly than within other stressed countries – are starting to pass the easing stimulus onto their customers, that is, to firms and households.
The need for structural reforms in all euro area countries
Despite difficulties, the impetus for reform has been strong in the stressed countries, while it has been much weaker in the rest of the euro area. This is the natural outcome of a crisis-driven reform process. However, the crisis has clearly shown that a strategy of postponing reforms is self-defeating, as it contributed to the accumulation of imbalances and vulnerabilities in good times and increased the cost of adjustment in bad times.
It is therefore crucial that the reform process is strengthened in all euro area countries, also those not affected by the crisis. Research has shown that undertaking coordinated reforms in all countries can boost GDP more than in a situation where each country acts alone. A more widespread approach to reforms in all euro area countries can therefore contribute to a stronger recovery in the stressed countries and in the euro area as a whole, through positive supply and demand effects.
Conclusions
The euro area has come a long way in addressing its problems. The progress that has been made is remarkable and covers a wide range of areas and actors. The ECB has been central in stabilising the euro area economy, smoothing the adjustment process of the stressed countries and restoring the proper functioning of the monetary transmission channel. At the supra-national level, EU governance has been strengthened and, in particular, the Banking Union is being established. And at national level, progress is ongoing towards restoring fiscal soundness and driving forward structural reforms.
The pay-off from these reforms is becoming increasingly visible: in 2013, we already saw signs of a turnaround in most euro area countries. In Portugal, real GDP has started its recovery path, fiscal developments have been positive and the unemployment rate has started to fall. And consumer and business confidence has been on an upward trend for many months. A similar improvement in confidence has also occurred in other countries that had been affected by the crisis. Expectations regarding incomes and employment are steadily being upgraded. This is a sign that households and firms are starting to internalise the benefits of the reforms implemented so far.
Looking ahead, the task of all euro area policymakers is to ensure that the improvement in confidence will be validated by actual outcomes. If implementation of structural reforms is pursued ambitiously and the reform momentum upheld, it seems likely that growth will surprise on the upside in the coming years.