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Executive Summary and Abstract 4 Briefing Notes - Changing of the Guard 11 DIRECTORATE GENERAL FOR INTERNAL POLICIES POLICY DEPARTMENT A: ECONOMIC AND SCIENTIFIC POLICY ECONOMIC AND MONETARY AFFAIRS Changing of the Guard Monetary Dialogue October 2011 COMPILATION OF BRIEFING NOTES Abstract On 31 October 2011, the eight years term of Mr Jean-Claude Trichet as ECB President will end. Mr Mario Draghi will succeed in office. This change of leadership in the ECB comes at a pivotal time for the euro area and the European Union as a whole. In this compilation nine monetary policy experts review the Trichet Presidency, especially evaluate the difference that the President has made through his own person and evaluate the challenges with which the new ECB President, Mr Draghi, has to deal with. IP/A/ECON/NT/2011-03 September 2011 PE 464.446 EN This document was requested by the European Parliament's Committee on Economic and Monetary Affairs. AUTHORS Guntram B. WOLFF, Deputy Director Bruegel, Brussels, with research assistance by Silvia MERLER Charles WYPLOSZ, Graduate Institute of International and Development Studies, Geneva Sylvester C.W. EIJFFINGER, CentER and EBC, Tilburg University and CEPR Daniel GROS, Director, CEPS Guillermo DE LA DEHESA, Chairman of the CEPR and of the OBCE Anne SIBERT, Birkbeck, University of London and CEPR Karl WHELAN, University College Dublin Ansgar BELKE, DIW Berlin and University of Duisburg-Essen Stefan COLLIGNON, Scuola Superiore Sant’Anna, Pisa and Centro Europa Ricerche (CER), Rome RESPONSIBLE ADMINISTRATOR Rudolf MAIER Policy Department Economic and Scientific Policy European Parliament B-1047 Brussels E-mail: [email protected] LINGUISTIC VERSIONS Original: EN ABOUT THE EDITOR To contact the Policy Department or to subscribe to its newsletter please write to: [email protected] Manuscript completed in September 2011. Brussels, © European Parliament, 2011. This document is available on the Internet at: http://www.europarl.europa.eu/activities/committees/studies.do?language=EN DISCLAIMER The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament. Reproduction and translation for non-commercial purposes are authorized, provided the source is acknowledged and the publisher is given prior notice and sent a copy. Changing of the Guard - Monetary Dialogue October 2011 ___________________________________________________________________________________________ CONTENTS EXECUTIVE SUMMARY AND ABSTRACT 4 BRIEFING NOTES - CHANGING OF THE GUARD 11 1. CHANGING OF THE GUARD – HUGE CHALLENGES AHEAD FOR THE NEW ECB PRESIDENT by Guntram B. Wolff (Bruegel) 11 2. CHANGING OF THE GUARDS AT THE ECB by Charles Wyplosz 31 3. CHANGING OF THE GUARD by Sylvester C.W. Eijffinger 43 4. CHANGE OF GUARD AT THE ECB: HOW TO LIMIT THE DAMAGE by Daniel Gros 55 5. CHANGING OF THE GUARD - TRICHET'S TRACK RECORD AND CHALLENGES AHEAD FOR DRAGHI by Guillermo De la Dehesa 69 6. CHANGING OF THE GUARDS by Anne Sibert 81 7. TRICHET’S ECB PRESIDENCY: A TRUE AGE OF TURBULENCE by Karl Whelan 97 8. CHANGE OF GUARD FROM TRICHET TO DRAGHI - WATCH OR NOT TO WATCH MONEY UNDER POLITICAL CONSTRAINTS by Ansgar Belke 113 9. EUROPEAN MONETARY POLICY UNDER JEAN-CLAUDE TRICHET by Stefan Collignon 145 3 Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________ EXECUTIVE SUMMARY AND ABSTRACTS Nine experts reviewed the ECB Presidency of Mr. Trichet and evaluated the challenges lying ahead for the incoming ECB President Mr. Draghi. Mr. Trichet's Presidency According to a majority of the experts Trichet delivered well on the primary task of the ECB during his term: guaranteeing price stability. Some experts accredited him also for his effective communication to the press and the guarding of the independence of the institution. Crisis management got a far more controversial reaction from the panel. Acknowledging an unprecedented crisis, making unconventional policy measures necessary, the range of views expressed reached from '[h]andling the financial crisis was Trichet's master piece' (Collignon) or '[b]y using extraordinary and unconventional monetary policy measures he avoided through his personal courage so far a worst case scenario' (De la Dehesa) to '[t]he track record during this period is decidedly mixed and worrisome' (Wyplosz). Especially the Securities Market Programme drew criticism, as Daniel Gros puts it: 'Continuation of the Securities Market Programme (SMP) on a large scale risks fracturing the Governing Council, but abandoning the SMP totally might lead to an even bigger financial crisis and the end of the euro.' Anne Sibert examines the transparency of the ECB and argues that '[t]he Securities Market Programme has made the ECB's continued insistence on secrecy particularily damaging'. She sheds also some light on the legitimacy and effectiveness of the ECB during the term of Mr. Trichet. She concludes that '[h]is notorious opacity about the decision-making process, however, has probably damaged the ECB's input legitimacy', especially '[t]he ECB's opacity about collateral policies is potentially much more damaging than the lack of transparency in monetary policy'. 'But his legacy is unfinished' (Wolff) and 'the effects from Trichet's previous policy actions' are still in the pipeline' (Belke). Mr. Draghi's Challenges There is no doubt that the incoming ECB President Mr. Draghi will face a lot of difficult challenges, mainly related to the financial and sovereign debt crisis. 'Major tasks during the new Presidency will be preventing a deterioration of the crises, pushing harder for a fiscal union within his mandate and taking further steps making the ECB more accountable and efficient' (De la Dehesa). One of the challenges will be 'a clear separation of responsibilities between the ECB and ESRB for monetary policy and macro- prudential supervision and the EFSF for fiscal policy and structural reforms in the Member States facing austerity measures' (Eifjjinger). Daniel Gros points in the same direction by stating that '[t]he key challenge for Mario Draghi will be to redefine the role of the ECB in the context of the euro crisis. The core problem is simple: the European Financial Stability Fund (EFSF) simply does not, and will not, have enough funds to undertake the massive bond purchase required to stabilise financial markets'. He recommends to register the EFSF as a special credit institution with 'access to re-financing by the ECB in case of emergency'. The newly emerged role of the ECB is also acknowledged by Guntram Wolff. He recognises the transformation of the ECB 'into an institution with far reaching executive authority and competencies', as a result of 'the lack of strong political leadership' and 'the absence of alternatives'. However, this new 'role of the ECB needs to be re-calibrated in the future' and '[o]verall, the ECB's role will likely be reduced in the future and the roles exercised will have to be matched by an increase in democratic accountability?'Additionally he adds a new dimension to the discussion by stating 'trust of citizens in the ECB has fallen according to 4 Changing of the Guard: Monetary Dialogue October 2011 ____________________________________________________________________________________________ the Eurobarometer survey and needs to be regained by addressing the challenges outlined.' Besides this he concludes that the most important task will still be 'to credibly continue to anchor inflation expectations'. The development of an adequate 'exit strategy' is another challenge: 'Trichet has handed over to Draghi the problem of "addict bank" that are reliant on ECB liquidity' (Whelan). Finding and adequate 'exit strategy' will be one of the main challenges handed over to Mr. Draghi. Charles Wyplosz address explicitly 'the issue of how Board members are appointed. The current "spoil system", which reserves a seat for each of the four largest countries, should not be tolerated any further. We need the best possible candidates that Europe can offer'. 5 Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________ Guntram B. WOLFF - 1. Changing of the guard - Huge challenges ahead for the new ECB President Jean-Claude Trichet deserves the highest praise for fighting inflation and for his handling of the crisis. But his legacy is unfinished and we still have to see whether he will be the one who saved the euro. The ECB has become an institution with far-reaching executive authority and competencies. This has been the result of a combination of factors, the lack of strong political leadership in the euro area and the absence of alternatives being the most important one. But this strong increase in executive powers has come at a price, and the role of the ECB needs to be re-calibrated in the future: i) The trust of citizens in the ECB in programme countries has fallen dramatically. The ECB should reconsider its strong involvement in the design of financial assistance programmes. It should soften the stance on sovereign debt restructuring and burden-sharing and in the case of Greece it should become the advocate of a clear debt cut at the expense of the financial sector; ii) Since the Security Markets Programme has been very controversial in some Member States, the ECB has to make greater efforts to explain its policy actions and needs to continue arguing for a viable
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