One of the hottest tickets for Eurozone market watchers these days is the chance to listen to Benoît Coeuré, a member of the Executive Board of the European Central Bank, opine on what lies ahead for monetary policy in the region. This week, he dropped in to do just that a dinner hosted by Deutsche Bank’s newly revived asset management division.
Intriguingly enough in light of the uncertainty surrounding the Federal Reserve’s policy plans, Coeuré covered the question of “exits” – specifically, the eventual pullback of monetary policies supporting the Euro and the region’s economy.
Coeuré said this week that the ECB doesn’t need to change its mandate to deal successfully with the Eurozone crisis, but anyone hoping to come away from his speech at the bank dinner with a clear idea of just when that policy exit would take place was doomed to disappointment. Coeuré stuck to generalities: what central bank policymakers need to bear in mind as they plan their exits and design a “post crisis” policy and institutional framework.
His vision of the ideal central bank exit from today’s markets is one that is tailored to fit the specific circumstances (a Fed exit won’t look the same as that at the ECB); one that is carefully communicated to market participants to avoid sending confusing signals; and one that is carefully thought out to ensure that the market doesn’t simply revert to the pre-crisis framework, which has its own set of risks.
In the first two categories, Coeuré argues that life will be easier for European policymakers than it will prove for their counterparts at the Federal Reserve. The question is whether an exit strategy is built into the instruments that the central bank has used to address the crisis.
The ECB, he notes, has “almost always used repos with a fixed term,” which makes it easier for it to stop buying or start selling. The nature of the mechanism also makes it easier to communicate. Quantitative easing, Coeuré says, “implies more than one instrument, across a variety of assets.” The complexity of the program creates the need for a multi-pronged communication strategy.
On the one question at the forefront of everyone’s mind, Coeuré remained even more vague: What will the post-exit money market look like? Reverting to the status quo isn’t an option. “We have to make the system robust and we have to make it work,” Coeuré declared, referring to the Eurozone’s banking system. “That is why we see so much need for a banking union.”
Coeuré, of late, has crisscrossed the continent, speaking everywhere from Copenhagen to Vienna about the need for the ECB to be an effective trans-national regulator, and discussing what needs to happen for that to take place. For banking confidence to revive across the Eurozone – meaning that depositors don’t worry about the national jurisdiction in which their bank is based – Coeuré has said there must be a single supervisory mechanism, a resolution mechanism and (most controversially) a common deposit guarantee mechanism (akin to the FDIC in the United States).