In 2014 the economy of the euro area as a whole grew, but the situation varied a lot between different countries and overall growth was slower than had been forecast, said Ardo Hansson, Governor of Eesti Pank in his speech to the Estonian Parliament on May 26, 2015. Data from the start of this year suggest that economic activity in the euro area is staging a modest recovery.
The competitiveness of the euro area has improved during the recovery from the crisis, but again the situation varies between countries. There are countries that have successfully introduced reforms, but there are also those where reforms have stopped or even gone into reverse.
- Here I must emphasise that long-term economic growth can only be built on reforms that raise economic competitiveness.
- The central banks of the euro area are able to offer support to economies in the short term, but there is a price to this, and such support can only be for a limited time. Central banks are not omnipotent and the responsibility for making reforms and explaining the need for reforms must fall squarely on the shoulders of governments and parliaments.
Monetary policy in the euro area had an eventful 2014. Inflation in the euro area was falling last year and the expectations for inflation among market participants were on the downside, which led the central banks of the euro area to maintain their accommodative stance on monetary policy. The accommodative monetary policy has three main elements:
- The Governing Council of the European Central Bank took the decision to cut the interest rates at which commercial banks can borrow from the euro-area central banks to their lowest levels ever under monetary union.
- Targeted long-term loans were offered to the commercial banks in the euro area. It is important that low interest rates be passed on to the real economy and that good business projects be able to get funding from banks on reasonable terms.
- Purchases of assets held by the private sector started and large-scale purchases of sovereign bonds were started in March this year.
- It is no secret that I am no supporter of the plan to purchase government bonds. Although the first small signs of success are apparent, we must still remain vigilant about the accompanying risks. Above all there is the moral hazard that would emerge were some government to lose its appetite for reform. The falls in interest rates provoked by the massive purchases of bonds will lower interest rates temporarily on government borrowing and this must not be used as an argument for pushing vital but painful reforms to some point far off in the future. Interest rates are only favourable for a short time and will support governments while they are making changes. If governments were to ignore the budget rules agreed in Europe and were to start to increase their debts further, the measures taken by central banks would be of very little help.
The other main task occupying central banks alongside monetary policy last year was the launch of single banking supervision. Starting supervision and carrying out a thorough and comprehensive assessment of the assets of European banks needed a lot of work from central banks and financial supervision authorities. The successful conclusion of this work let us say with confidence that the biggest and most significant banks in a range of countries in Europe are now assessed and supervised on the same terms. In Estonia, Swedbank and SEB Pank have come under single supervision.
Source: Speech of the Governor of Eesti Pank to the Riigikogu at the presentation of Eesti Pank’s Annual Report 2014