G. Stournaras: This is how we will get out of the crisis

By Leonidas Stergiou

With the pandemic persisting, with new mutations threatening human lives, uncertainty remains, which translates into risk and cost in terms of prices and returns. However, vaccines and flexible monetary and fiscal policy, having learned lessons from past crises, create other conditions for defense and a dynamic exit from the crisis. There should be no complacency and for this reason, the ECB’s monetary policy monitors many elements and intervenes purposefully.

The restatement of the inflation target, the extraordinary bond market program and the interest rate policy are not just random moves. Greek central banker Giannis Stournaras, in his speech at the 5th ECB Simulation Conference, “Get Involved” explained in detail the market conditions, but also how the defense mechanism of the revised monetary policy works.

New approach

As he explained, the Eurosystem is now better prepared, than in the past, to fulfill its primary mandate: to maintain price stability, to ensure the value of the euro and to boost economic growth and job creation. work.

Last July took into account the fundamental changes that have taken place in the international economic environment since the previous review of the strategy in 2003. These include the reduction of the so-called “natural rate” (natural rate of interest) which limits the interest rates from central banks, as well as a slowdown in productivity and a decline in the active population due to the continuing aging of the population, as well as developments such as climate change, globalization, rapid digital transformation and the flourishing of digital currencies. markets and pricing, posing new challenges for central banks.

The new strategy stipulates that price stability is best maintained by pursuing an inflation target of 2% in the medium term. Compared to the current wording aimed at lower inflation, but close to 2%, the new approach now makes it clear that 2% is not the maximum level that is considered acceptable for inflation, but our symmetrical target. Inflation deviations from this target, both negative and positive, are equally undesirable. It is clarified that in the past, only the upward deviations were undesirable.

Interest rates-inflation

In addition to interest rates, additional factors that are taken into account in determining the inflation target are differences in the level of inflation between countries, rigidities in adjusting nominal wages downwards, and bias in how the consumer price index is measured ( HICP).

We also recognize in the new strategy that when the economy operates close to the nominal interest rate threshold, particularly strong or persistent use of monetary policy measures is required to prevent the consolidation of negative deviations from the inflation target. This may also mean a transitional period in which inflation is moderately above the 2% target.

The PEPP program

In previous crises, but also during the pandemic period, the ECB resorted to extraordinary, less conventional, measures, as monetary policy interest rates had reached historically low levels. During the pandemic, the Eurosystem securities markets under the Pandemic Emergency Purchase Program (PEPP) played a key role in alleviating financial turmoil and enhancing monetary easing. This program was mobilized immediately after the outbreak of the pandemic and, as announced on December 10, 2020, the net monthly purchases will last at least until March 2022 and in any case until the pandemic crisis is over.

The PEPP emergency program granted Greek government securities a derogation from the minimum credit rating requirements of the Public Sector Purchase Program (PSPP), which helped reduce the impact of the pandemic on financial conditions in Greece.

Liquidity injections

During the pandemic, the measures adopted before the outbreak continue to apply. The Eurosystem’s balance sheet has risen from around € 4.7 trillion at the beginning of 2020 to almost € 8.5 trillion in November (during the same period, the Bank of Greece’s balance sheet has increased from around € 110 billion to around € 230 billion) .

Prerequisite for success

For macroeconomic stabilization to be successful, monetary policy needs to continue to be complemented by targeted and coordinated fiscal measures. The new strategy recognizes the importance of pursuing an anti-cyclical fiscal policy that enhances the effectiveness of monetary policy.

The main initiatives include providing the maximum possible fiscal flexibility provided for in the Stability and Growth Pact and the Multiannual Financial Framework Agreement. At the same time, support programs were activated for employees (through the tool Support to mitigate Unemployment Risks in an Emergency – SURE), businesses (with the creation of a pan-European lending fund, with an emphasis on small and medium-sized enterprises) and Member States (with a dominant measure the creation of the Next Generation EU – NGEU development fund). The funds of the NGEU recovery fund can be used for loans and grants to governments for development actions, the most important of which are the transition to green energy, energy saving, the digitization of the public sector and the economy in general, as well as its shielding. health sector.

Climate change

Recognizing the need to address the consequences of climate change, the European Union, in addition to the funds provided for in the NGEU program, has set a goal of achieving climate neutrality by 2050. The European Green Agreement sets out policies in 2019 to achieve this goal. objective, such as mitigating global warming and reducing greenhouse gas emissions. The intermediate goal is to undertake a package of proposals to reduce emissions by at least 55% by 2030 (Fit for 55).

As Mr. Stournaras underlined, the Bank of Greece is one of the first central banks in the world to deal with climate change and sustainability, having established, since 2009, the Climate Change Impact Study Committee (EMEKA).

In fact, this week a new periodic exhibition was launched at the Bank Museum entitled “Economy and Climate: Handle with care.” The purpose of this exhibition is to highlight the role of central banks in addressing the effects of climate change and to strengthen the active participation of the public, especially the younger generation like you, in the urgent mobilization required to meet the challenges.

The goal is a modern, robust and green economy, guided by the social well-being of all citizens. And in this effort, the central banks and the Bank of Greece in particular, contribute with all their might, within the framework of their mandate. In closing, I want to express the belief that with the right coordination of everyone’s efforts, we will be able to contribute to a substantial and sustainable development, for a better and sustainable future.