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The Eurosystem Challenges and
Perspectives Warwick Economic Summit University
of Warwick 14 February 2009 Ewald Nowotny
Governor of the Oesterreichische Nationalbank
(Austrian central bank) www.oenb.at
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Forecasts for EU and Euro Area Countries
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Challenges for Monetary Policy I

• In contrast to the last few years No trade-off
  between short-run developments in inflation and
  output.
• In the current crisis, inflation and output are
  behaving like after a demand shock. Both are
  dropping significantly.
• Thus, the policy response is straightforward
  decrease policy rates.

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Challenges for Monetary Policy II

• Policy interest rates have decreased worldwide.
  However
• slow effect on the real economy
• the pass-through to bank lending rates might be
  hampered because of the financial crisis
• a too-swift decrease of policy rates might signal
  panic
• what happens when the zero lower bound is reached
• difficulties in the implementation of monetary
  policy

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Challenges for Monetary Policy Implementation

• Persisting tensions in global money markets
• Counterparty risks
• Liquidity risks
• led to
• volatile overnight rates
• high term interest rate spreads
• declining volumes, signs of rationing
• Money markets crucial for the
• implementation of monetary policy
• derivative markets, interest rates for households
  and firms

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ECB Liquidity Management Stability within the
Turmoil

• Key challenge Distribution of liquidity in the
  system when interbank lending is impaired
• Pre-crisis ECB framework
• Large group of banks admitted to regular tender
  operations and standing facilities
• Broad range of collateral
• Weekly and three-month open market operations
• No need for special facilities.
• Alleviate strains in term funding markets by
  increasing term funding.

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After the Collapse of Lehman Brothers

• Unprecedented level of stress in financial and in
  particular interbank markets.
• Flexible reaction
• Full allotment in tender operations
• Wider range of eligible collateral
• Temporarily significant involvement in
  intermediation
• Alleviate stress in global markets
• Stepped-up cooperation between central banks
• Unlimited access to US dollars for euro area
  banks
• Overall Operational framework has passed the
  test well, has provided a maximum of
  continuity

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• 51 years after the signature of the Treaty of
  Rome, the euro remains one of the most tangible
  signs of Europes determination to forge a common
  future and work together to secure peace and
  prosperity for our continent.
• José Manuel Barroso June 2008
• Moreover, the crisis shows that there is more to
  the euro than its role as a means of transaction

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The Euro Has Indeed Become a Global Player
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The Benefits of the Euro in the Financial Crisis

• The euro protects Europe
• EMU shows that in turbulent financial waters, it
  is better to be on a large, solid and steady ship
  rather than on a small vessel.
• Businesses were sheltered from exchange rate
  volatility. No competitive devaluations.
• With the single currency, Europe has been able to
  act swiftly, decisively and coherently
• Would it have been possible to protect separate
  currencies fromthe fallout without the euro?
• European authorities, parliaments, and central
  banks reacted immediately
• Europe has shown that it is capable of taking
  decisions
• The crisis has improved popularity of the EU.
  People are more convinced of the achievements and
  institutions of EU and EMU.

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Future Challenges for EMU and the Euro

• In the short run
• Maintain price stability
• Return to the path of growth and stability in
  Europe, stimulate employment and create jobs
• Overcome the financial crisis maintain
  financial stability
• Redesign regulatory and institutional frameworks
• In the medium to long run
• Cope with globalisation
• EU implement the Stability and Growth Pact
  firmly and credibly, render economies more
  productive, innovative, avoid competitive
  divergences, stimulate scientific and
  technological progress
• Address ageing population
• Handle euro area enlargement optimally increase
  from 11 members in 1999 to 16 members in 2009
• Strengthen the euro areas international role and
  the euros image

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