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Five years of financial crisis and economic contraction have had far reaching implications for the euro area.
First, the deep recession in the euro area has been manifested in low asset returns or, more generally, poor investment opportunities. In such an environment, looser monetary policy conditions are the necessary response to bring the economy back on to a sustainable growth path in an environment of price stability. Far from helping savers, higher monetary policy interest rates would only have depressed the economy further, delayed the recovery and contributed to downside risks to price stability. Additionally, asset returns would have been dampened for longer with negative implications to the net wealth of savers.
Second, borrowers in stressed countries as well as savers in all countries have suffered from the consequences of financial fragmentation. The ensuing flight to safety has led to (i) soaring yields and lending rates in stressed peripheral countries, and (ii) squeezed yields in core countries. As a result, financial fragmentation has negatively affected both borrowers in stressed peripheral countries and lenders in the core euro area. Therefore, non-standard monetary policies, which aim at improving the transmission of monetary policy by reducing financial fragmentations in the euro area, have mitigated the negative implications of financial fragmentation on both borrowers and lenders.
Third, the economic contraction has been accompanied by rising unemployment and lower incomes. Undoubtedly, the pain has not been evenly shared. The distribution of income has widened in the euro area as well as in other OECD countries, with poorer households and young people being hit harder.
However, it is not the mandate of the ECB, or of any modern central bank, to address rising inequalities or to steer the distribution of income, whether between rich and poor or between lenders and borrowers.
Mr Coeuré said: “Our mandate is to preserve price stability. This is our contribution to the efficient working of our market economy. In the current phase of the European business cycle, characterised by disruptions and fragmentation in euro area financial markets, our mandate is best served by tackling the malfunctioning of markets and ensuring a homogeneous and smooth transmission of monetary policy across sectors and countries. Any re-distributional effect of our policies must be read as a means to an end that is price stability. These effects are bound to be temporary, as such are the real effects of monetary policy interventions. In the long run, real rates are determined by natural economic forces, by productivity-enhancing public intervention and by the quality of our market institutions that are beyond the reach of monetary authorities.“
Looking forward, the welfare of euro area savers will depend on efforts to reduce financial fragmentation by building a proper banking union, with its supervision and resolution arms, by strengthening euro area governance and by enforcing rules that ensure that member countries run sustainable policies. It will depend on efforts to lift productivity by investing in technologies and skills – more than on any decision the ECB has taken and will take in the future.