Shadow ECB Council Members see no need for further action

The ECB Shadow Council kept growth and inflation forecasts largely unchanged and said euro-zone monetary policy should be on hold for now as existing measures are given time to work.

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ECB's headquarters in Frankfurt. Quelle: dpa

Frankfurt Most members however expressed concern about the German current account surplus, which is broadly viewed as unsustainable in the long-run. Some believe that market forces will correct the problem, while others argued that Germany should do more to increase demand and invest in future productivity.

Growth forecast revised slightly upwards

Compared to three months ago, the average forecast for inflation has been revised slightly downwards from 0.3 percent to 0.2 percent this year. This is close to the ECB’s staff projection from March of 0.1 percent.  For 2017, the forecast was revised slightly upwards to 1.2 percent, also close to the ECB’s projection of 1.3 percent. The Shadow Council’s mean forecast for GDP growth for 2016 has been revised upwards by 0.1 percentage points for this year and next year respectively to 1.5 for 2016 and 1.6 for 2017.

Shadow Council macroeconomic forecasts

(ECB’s March projections in brackets)
20160.2 (0.1)1.5 (1.4)
20171.2 (1.3)1.6 (1.7)
Contributors: M. Annunziata; A. Bosomworth; S. Broyer; J. Callow; J. Henry, J. Krämer; W. Buiter.

With Diminishing Returns, ECB Should Hold Steady

With the euro zone economy slightly improving and some measures from March still taking effect, Shadow Council members were in broad agreement that the ECB should keep monetary policy on hold for the time being.

A number of participants argued that the ECB is seeing diminishing returns from its monetary policy actions, reaching the limits of what is possible, and therefore had little to gain from further expansion. One member suggested the central bank may be facing structurally-low inflation that will take time to shift upwards, though one other member expressed confidence that rising oil prices will soon start to shine through. The ECB should be patient and allow existing measures to take effect. Any changes now would simply disturb markets at an inopportune time, one member noted.

Even if ECB policy should remain on hold for now, one member suggested it would be a good time for the ECB to develop a plan for tapering, pointing out that the Federal Reserve began developing a tapering plan three years before it began implementing an exit strategy.

Risks Increasing

A number of members argued that there remained risks for financial markets associated with negative interest rates, though a majority believed the rewards continued to outweigh the costs. One member argued for a more expansionary fiscal policy, but said the ECB would have to “swallow the risks” of its policies as long as that is not forthcoming. Another member noted there remained little understanding of exactly how the ECB’s unconventional measures will work over time. One member continued to support raising interest rates above zero, arguing that the associated risks were too high.

Concerns Over German Current Account Surplus

Most shadow council members expressed concern about Germany’s large current account surplus. Many viewed it as a “disequilibrium” that is unsustainable in the long run and continues to represent a potential threat to the euro zone. Some members were more relaxed on the issue, however, arguing the surplus was a natural result of import/export factors that would work themselves out via market forces.

A few members also noted that the concerns within the euro zone in particular have diminished, as much of Germany’s surplus is with countries outside of the euro zone and European Union. One member disagreed, however, warning that southern European countries currently running surpluses could easily tip back into deficit as economic slack and unemployment is reduced. This could once again put the euro zone economy into disequilibrium.

One of the main problems of the huge current account surpluses was seen in its relation with deficits in other countries, which are financed by debts. Questions were also raised about how long deficit countries will still be able to finance those debts.  

Some members rejected the view that current account surpluses have had an influence on interest rates in the euro zone. One argued that lower rates in Germany were the result of excess demand for financial assets, an ongoing reluctance of many debtors to go into further debt, and German banks reducing risk-taking and therefore lending to the periphery since the financial crisis.

Private Agents to Blame

Many council members noted that the current-account surplus was primarily being impacted by private economic agents. One key reason for savings among households is changing demographics pushing more retirement saving, while another may be a reluctance of Germans to invest in riskier high-yielding assets, forcing many to save more in today’s low-interest rate environment to get the same result.

A number of members also pointed out that cash hoarding by companies is making up a larger chunk of the surplus today than in previous decades, feeding into a chronic lack of private investment across Germany. Uncertainty over the future development of the economy and of future technologies have held back company spending, one member noted.

A Challenge to Correct the Problem

Even among those believing the surplus is a concern, from a policy perspective, dealing with current account imbalances is considered difficult. Forcing companies to spend rather than hoard cash is seen as especially difficult. One member however called for reducing “man-made barriers” to entry into industries as a means of bolstering private spending, but another member cautioned against government intervention to encourage private spending, warning that government incentive programs could do more harm than good.

Some believed that market forces will correct the problem by itself over time, while others argued that Germany should do more to increase demand and invest in future productivity, for example in basic research, education and infrastructure.  A few members however noted there is no real incentive for the German government to increase spending in the short-term with unemployment low and the economy growing above potential. So long as the fiscal policy remains at national level, there is no incentive for Germany to spend simply because of euro-area factors.

Some members suggested more coordinated measures at the euro-area level to boost spending. One member suggested spending in those countries with economic slack, financed by the ECB, which would also help reduce the current account imbalance.


Members’ individual votes on main refinancing rate (currently 0.0 %):

MemberAffiliationFixed rate            Deposit rate   
José AlzolaThe Observatory GroupUnchanged       Unchanged     
Marco AnnunziataGeneral ElectricUnchangedUnchanged          
Elga BartschMorgan Stanley   
Andrew BosomworthPimcoUnchangedUnchanged        
Sylvain BroyerNatixisUnchangedUnchanged                  
Willem BuiterCitigroup -0.25-0.5                  
Jacques CaillouxRokos Capital -0.1-0.1                  
Julian CallowElement CapitalUnchangedUnchanged                  
Eric ChaneyAxaUnchanged-0.1                  
Janet HenryHSBCUnchangedUnchanged                 
Merijn KnibbeWageningen UniversityUnchangedUnchanged       
Fabian LindnerIMKUnchanged   Unchanged 
Jörg KrämerCommerzbank +0.25+0.25 
Richard WernerUniversity Southampton +0.75                   + 0.75                    

Frankfurt, 25th May, 2015

Jan Mallien, Christopher Cermak

Background information

The ECB Shadow Council was founded in 2002 upon an initiative of Handelsblatt, the German business and financial daily. It is an unofficial panel, independent of the ECB/Eurosystem, and comprising fifteen prominent European economists drawn from academia, financial institutions, consultancies, companies and research institutes.

The Shadow Council usually convenes by telephone conference on a quarterly basis. Its discussions are intended to formulate an opinion as to what monetary policy decision its members believe that the ECB's Governing Council ought to undertake, both at its forthcoming meeting and also on a three month horizon. Shadow Council members are encouraged to submit their own economic projections for euro area activity and inflation on a monthly basis, which constitutes the panel's forecast consensus as published each month.

The Shadow Council's discussions and recommendations differ from surveys of economists concerning the outlook for ECB interest rates because the Shadow Council recommendation expresses the majority view of its' members opinion about what the ECB should do, rather than what they forecast it to do (and hence the "normative" views as expressed by Shadow Council members on what they consider the ECB ought to do can and often do differ from what they might say they expect the ECB to do). This "normative perspective can, however, give an early indication of shifts in the balance of opinion in the expert community, as can be seen by comparing the historic recommendations of the Shadow Council against subsequent decisions undertaken by the ECB Governing Council.

Members of the Shadow Council base their recommendations on the ECB's objectives as defined under the EU Treaty, though Shadow Council members do not necessarily adopt exactly the ECB's specific interpretation of its mandate: most Shadow Council members consider that a medium term inflation objective of two percent with a symmetric tolerance band around it would be clearer, more realistic and more appropriate than the definition adopted by the Governing Council, which defines price stability as an inflation rate of "below, but close to, two percent", in the medium term.


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