Summary of the March Monthly Report
Approaches to strengthening the institutional framework of the European monetary union
The financial and sovereign debt crisis has confronted the European monetary union and its member states with major challenges, and has yet to be overcome. Reforms have been carried out and measures taken in many policy spheres. Since the decision was taken to set up a banking union, however, calls by some for a political or fiscal union and a fundamental reform of the EU treaties seem to have fallen silent. Majority political support for a significant transfer of sovereign powers from the national to the European level appears an unlikely prospect. While this remains the case, it will be crucial to shape and strengthen the existing institutional framework of the euro area over the medium to long term in such a way that it can reliably live up to its promised role as a union of stability on a lasting basis.
Member states of the European monetary union have more or less free reign in economic and fiscal policy, despite all the coordination mechanisms in place. The other side of the coin is that individual member states are, in principle, responsible for their own debt, and both monetary financing and joint liability are prohibited, which is consistent with the basic principle of the individual responsibility of states, but also of investors. The monetary union therefore has to be able to withstand, to the greatest extent possible, the extreme scenario of a member state becoming insolvent. The original framework did not take adequate account of this aspect or, notably, its repercussions for financial stability. Although numerous reforms have been launched to combat the crisis, in many areas they tipped the balance towards more elements of joint liability.
All in all, a number of challenges still lie ahead before a more consistent framework has been achieved which is more effective in preventing future crises and, in particular, ensures that the primary focus of monetary policy remains on price stability. This article outlines various approaches to making the structure of European monetary union more resilient to crises in future, including measures to strengthen financial stability. Amongst other things, this should be done by minimising the risks posed to the particularly systemically important banking system by sovereign solvency problems, for example by curbing the preferential treatment of government debt in banking regulation in the medium term and ending it in the long term. Negative repercussions of bank failures for sovereigns also need to be kept as low as possible, however. To do this, banks' loss-absorbing capacity needs to be further strengthened. If necessary, it must be possible to conduct orderly resolutions of large, interconnected financial institutions, too, without recourse to government funds being required.
In the area of fiscal policy, budgetary surveillance and the implementation of fiscal rules should be improved, and consideration given to a new institutional framework. It also appears necessary to reinforce the disciplining effect of the financial markets on fiscal policy and to develop a crisis management framework that is more compatible with incentives. Stability-oriented monetary policy crucially relies on its ability to resist the pressure to be made responsible when banks or sovereigns are overindebted.
The importance of macroprudential policy for monetary policy
The global financial crisis has sparked intense debate amongst economists regarding the future shape and role of monetary policy. Certain elements of the pre-crisis monetary policy consensus remain valid even today – in particular, the continued paramount significance of price stability. By contrast, one issue that remains unsolved is the relationship between monetary policy and financial stability. Although no definitive answers can be expected as yet, some initial insights have been gained.
There is a broad consensus that a new policy area with its own set of instruments is required to safeguard financial stability. High priority is therefore being given, as ever, to the rapid establishment of an effective macroprudential policy. As both monetary policy and macroprudential policy measures target the financial sector, it is inevitable that there will be interactions between these two policy areas. However, at the current juncture, experience and knowledge of the functioning of macroprudential instruments, their calibration and the way in which they interact with each other and with monetary policy are still rather limited.
A monetary policy geared towards price stability in the medium term is no guarantee on its own for the prevention of unwelcome developments in the financial markets that could spill over into the real economy and ultimately endanger price stability. The recent past has shown that the monetary policy stance pursued can influence financial market players' propensity to take risks, in particular. Monetary policymakers must therefore also duly consider the effect of their decisions on the stability of the financial system as a whole. This suggests two things: first, that monetary policy is symmetrically structured over the financial cycle – that is to say, a monetary policy stance that is generally stricter during periods of strong economic growth and low inflationary pressures and is aggressively eased in the short term during marked downturns, but a less persistent expansionary monetary policy stance following a period of economic downturn – and, second, that medium and longer-term risks to price stability are weighed up. A symmetrical monetary policy in this vein could help to avoid a situation in which financial market participants take on too much risk.
In principle, monetary policy could also explicitly pursue financial stability as an objective in its own right. However, in addition to political-economic reasons, the primary obstacles to this are excessively high expectations placed on the effectiveness of monetary policy instruments with regard to safeguarding financial stability and a still-limited understanding of the way in which these two policy areas interact.
The Eurosystem's monetary policy strategy is sufficiently flexible to respond appropriately to future challenges. A fundamental change in strategy is not required. More work should be done on implementing an effective macroprudential policy: this would not only improve the stability of the financial system as a whole but also maintain the conditions in which the single monetary policy is able to ensure price stability in accordance with its mandate.
German balance of payments in 2014
At 7½% of GDP, the German economy's current account surplus expanded considerably in 2014 to reach a new post-war all-time high. The greatly increased surplus in the goods account was of paramount importance in this regard. Taking the average of the past two years, net yields on cross-border investment remained below the high amounts recorded in 2011 and 2012. Although Germany's net external position continued to rise, the positive effect of this upturn on the investment income sub-account more than compensated for the further decline in the average interest rate and the narrowing yield spread on the assets side.
Following a period of stagnation in 2013, export sales by enterprises picked up considerably again in 2014 (given the relatively subdued level of global economic activity, this can be attributed to regional and product range effects). Countries experiencing comparatively strong economic growth such as the United States, the United Kingdom and China displayed a marked increase in demand for German-made automobile products as well as for pharmaceuticals and, to a degree, machinery and equipment. In addition, substantial terms of trade effects caused the trade surplus to widen yet further. During the period under review, this resulted from the lower cost of imported commodities, first and foremost the plummeting crude oil prices at the end of the year. In real terms, the volume of imported goods in fact increased at a more pronounced rate than that of exports given the distinct upward trend in domestic economic activity.
When assessing this figure in a general macroeconomic context, it is important to bear in mind that the increased German current account surplus in 2014 was largely generated by exogenous developments in the external setting.
This increased current account surplus was flanked by a widening balance on Germany's financial account, thanks in large part to higher net capital exports in direct investment. These outflows were largely fuelled by an increase in German enterprises' direct investment abroad while foreign enterprises only marginally expanded their presence in Germany. In 2014, portfolio investment decisions were influenced by the generous volumes of liquidity being provided by the Eurosystem and expectations of large-scale quantitative easing. This climate was reflected by sharply declining yields in Germany, a consistently pronounced interest on the part of domestic investors in foreign securities and comparatively weak demand from abroad for German debt securities. With respect to other investment, cross-border flows of capital broadly offset one another. In this context, in 2014 the Bundesbank's TARGET2 claims decreased somewhat on balance. Cross-border cash transactions were recorded in the balance of payments for the first time; more recent estimations make it possible for figures to be recorded retroactively for the period since the euro banknotes and coins were introduced.
Securities holdings statistics for analysing securities holdings in Germany and Europe: methodology and results
The bankruptcy of Lehman Brothers in autumn 2008 made it clear that detailed information on which investors hold which securities, issued by whom and in what volume is vital for ensuring that the European Central Bank (ECB) and the Eurosystem national central banks are able to fulfil their tasks. For this reason, in the fourth reporting quarter of 2013, securities holdings statistics were introduced across Europe; the national central banks submit these statistics on a security-by-security basis to the Securities Holdings Statistics Database, which is jointly operated by the Bundesbank and the ECB. These statistics comprise holdings of debt securities, shares and investment fund shares. On the one hand, sectoral data are recorded, with the securities holdings being broken down by economic sector and the investor's country of origin. This focuses on the securities of euro-area investors and paper issued by residents and held by investors outside the Eurosystem. On the other hand, the group data capture the securities holdings owned by the largest banking groups in the euro area.
The Bundesbank's securities holding statistics (Statistik über Wertpapierinvestments) form the basis for the German contribution to the Securities Holdings Statistics Database. To compile these statistics, the Bundesbank collects group data from large German banking groups as well as sectoral data from all financial institutions domiciled in Germany. As the sectoral data have been available on a security-by-security basis since the end of 2005, it is already possible to conduct up-to-date in-depth analyses and research projects on the scale and structure of the securities holdings in Germany. This means that the developments of securities holdings since the outbreak of the global financial crisis can be examined. The data furthermore provide information about the distribution of the volume of securities held in Germany among the different investor groups. In addition, derived flow variables can be used to assess to what extent the changes in marked-to-market holdings are attributable to the securities transactions of individual investor groups or to other developments such as price changes.
The introduction of harmonised securities holdings statistics and uniform processes for compiling data for the Securities Holdings Statistics Database at the European level further improves the comparability, quality and completeness of data. The information from across Europe enables a variety of flexible analyses to be conducted, in particular for risky segments of the European financial system. The symmetrical access of the entire Eurosystem to all data is of particular significance as it ensures a uniform basis of information for decision-making processes in the European committees. Future developments in the securities holdings statistics of the European System of Central Banks (ESCB) are closely linked to the provision of microdata for other areas of statistics. For example, an expansion of group data is currently under consideration to enable individual securities holdings data to be evaluated in connection with the granular information from the planned pan-European credit register.