20180709-NATIXIS-Should_the_ECB_be_prevented_from_intervening_in_fiscal_policy__5页_584kb

Flash Economics Summary: Should the ECB be prevented from intervening in fiscal policy?

Core Content

This document discusses the implications of the European Central Bank (ECB) intervening in fiscal policy through the purchase of government bonds, and evaluates whether such intervention should be restricted. It outlines the rationale for and against the ECB's involvement in fiscal matters, emphasizing the need for a more transparent and accountable mechanism to support countries in liquidity crises.

Main Views

1. ECB's Intervention in Fiscal Policy

• The ECB has intervened in euro-zone fiscal policies by purchasing government bonds, which has led to:
  • A sharp decline in long-term interest rates (Chart 2).
  • Reduced interest payments on public debt, thereby restoring fiscal solvency for euro-zone countries (excluding Germany) (Charts 3A and 3B).
• This intervention has effectively supported governments during financial stress.

2. Drawbacks of ECB's Fiscal Intervention

• Moral Hazard: Governments may perceive the ECB as a guarantee for fiscal solvency, leading to continued expansionary fiscal policies (Chart 4).
• Monetary Policy Misalignment: The ECB has adopted an unusually expansionary monetary policy (zero interest rates, quantitative easing until 2018), which may not be justified by the actual economic needs of the euro zone (Charts 5A and 5B).

3. Alternative Mechanism

• If the ECB is no longer allowed to intervene in fiscal policy, another mechanism—likely the European Stability Mechanism (ESM)—should be established to provide liquidity support.
• Advantages of ESM:
  • Transparency: Support is decided by euro-zone countries and is explicit, unlike the ECB's discretionary intervention.
  • Accountability: ESM loans are quantifiable and require agreement among member states, reducing the risk of moral hazard.

Key Information

• The ECB's bond-buying program has been a critical tool in stabilizing the euro zone during the crisis.
• However, this intervention has raised concerns about the ECB's independence and the potential for encouraging unsustainable fiscal behavior.
• Restricting the ECB's fiscal intervention could lead to more responsible fiscal policies and a clearer separation between monetary and fiscal policy.
• The ESM is proposed as a viable alternative to provide support to countries in liquidity crises without interfering with monetary policy.

Conclusion

• The ECB should be prevented from intervening in fiscal policy to avoid moral hazard and ensure monetary policy remains aligned with economic needs.
• A non-monetary mechanism such as the ESM would provide more transparent and accountable support to countries in financial distress.

Disclaimer

• The document is intended for professional and qualified investors only.
• It is confidential and not a personalized investment recommendation.
• No liability is accepted for the accuracy or completeness of the information.
• The views expressed are those of the authors and do not reflect the views of Natixis or its affiliates.
• The document is subject to regulatory restrictions in various jurisdictions, and distribution is limited accordingly.