BSI Economics Conference at the Sorbonne, Place du Panthéon
« What can we expect from the ECB? »
In partnership with Macrobond
On December 11, 2014, the BSI Economics conference was held at Paris Panthéon Sorbonne University (Paris) in partnership with Macrobond, marking the second year of development for the independent French economic think tank.
BSI Economics is made up of 50 professional and academic economists working in public, institutional, and private structures. The publication of written contributions and the organization of conferences should enable the emergence of a new generation of economists experienced in public debate, given the long-term challenges facing our economy.
» Our activities and partnerships are growing. With more than 350,000 readers, our organization offers an educational platform for the general public and an analytical platform for professionals. Our current projects will help expand our offering, notably with the development of a European economic consensus in 2015, » comments Arthur Jurus, president of BSI Economics.
The first debate concerned the quantitative easing project on sovereign debt (« sovereign QE »). Frédérik Ducrozet, market economist for the investment banking division of Crédit Agricole SA, was BSI Economics’ guest during this conference. In his view, a clear distinction must be made between the political, financial, and economic dimensions of the ECB’s action. It is » a political issue in its own right » requiring the broadest possible consensus, especially on issues as sensitive as asset purchases. This dimension is often underestimated by the markets. Mario Draghi recently pointed out that while unanimity is not required to implement QE, it can be designed in such a way as to achieve consensus, which is not yet total for sovereign QE. Despite this, » QE is almost inevitable » due to the deterioration in inflation and the relative ineffectiveness of the ECB’s actions to date. Indeed, three major factors must be taken into account: (1) forecasts have been revised downwards for early 2015, (2) there is an » urgent need » to increase the ECB’s balance sheet to the target level set by Mario Draghi at its 2012 level, (3) After years of convergence, there has been a growing divergence since the end of 2013 between the size of the balance sheet and the 10-year German Bund . Within the Executive Board, Sabine Lautenschläger sees more costs than benefits in QE, while Peter Praet sees it as a positive signal. The issue of lowering real interest rates is also essential. Despite this, there remains a fear that QE will lead to a « vicious circle » that would require the constant relaunching of several QE programs, as was the case with the Fed. It will also be necessary to « consider the question of how QE should be distributed among countries. » Finally, an increase in the size of the balance sheet can be mitigated by the already effective anticipation of the exchange rate’s impact on prices.
The second debate focused on negative interest rates, asset purchases, and balance sheet risks by the ECB. Julien Pinter (economist at BSI Economics) does not view negative interest rates as » a tool that acts as a ‘stick’, penalizing banks that do not lend to businesses. » He points out that other positive effects were expected. In response to the possible consequences of excessive balance sheet risk for the ECB, Julien Pinter noted that purchases of ABS and covered bonds could be » a very lucrative financial operation for the Eurosystem, and ultimately for governments . » In the event of purchases of riskier assets, the risks of a loss of credibility following financial losses would be very low for the Eurosystem, as it has « an exceptionally large safety cushion (capital and revaluation reserves) for a central bank . » Finally, the economist discussed the assets that the ECB should focus on in order to implement its future programs, proposing a distinction between the credit easing effect (improving bank financing) and the quantitative easing effect (influencing demand and exchange rates) associated with asset purchases. In his view, » it is the quantitative easing effect (and particularly the exchange rate effect) that will be sought above all. In this sense, the question of quantitative easing in the secondary market for sovereign bonds (« sovereign QE ») arises. »
The third debate offered a reflection on the ECB’s monetary policy, which is expansionary in many respects: » forward guidance, which ensures that key interest rates will remain anchored around zero for the long term, credit easing, which is being extended through asset purchase programs, and quantitative easing , which remains highly likely in the short term , » according to Julien Moussavi (economist at BSI Economics). This highly accommodative monetary policy would have consequences for different asset classes: (i) the euro, which is expected to continue to fall, (ii) sovereign interest rates, which are expected to remain at very low levels, (iii) the compression of peripheral spreads, which could continue at a minimum, (iv) credit conditions and demand, which are expected to improve, and (v) equity markets, which are expected to benefit overall from this continuing abundance of global liquidity. On the subject of liquidity, however, the economist points out that » the players involved in this excess liquidity have changed: the ECB and the BoJ are now taking over from the Fed and the BoE . »
After a few exchanges with several economics and finance professionals who attended the conference, a cocktail reception provided an opportunity for many to discuss and share their analysis. It was also an opportunity to acknowledge and encourage the initiatives of BSI Economics for 2015.
