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The European Union isn’t ready for another economic downtime and the next meltdown could have the limits of the European Central Bank tested, thus pushing interest rates further into negative territory. That’s what Benoit Coeure, ECB board member revealed on Friday.
Having fought off the EU’s debt downtime with a 2 trillion euro spending burden, a number of ECB statesmen are worried that governments haven’t succeeded in effectively utilizing their time, unable to fix the EU’s shock absorption capacity, thus leaving it very vulnerable to upcoming shocks.
Arguing that most institutional failings, which provoked the last downtime haven’t been tackled yet, Coeure warned that even a minor downturn could generate huge social and economic costs.
The next meltdown might make the European Central Bank to test the restrictions of its mandate.
Depending on the nature of the approaching hazard, policy action may require pushing short-term rates further into negative territory. Alternatively, the ECB might opt for purchases of assets, which appear to be far riskier than corporate or public debt. It might also get the EU closer to monetary financing of authorities.
In spite of the fact the European Central bank has already tamed its stimulus measures since the climax of the downtime, its deposit rate keeps to a record minimum of -0.4%, the key bank holds over two trillion euros worth of corporate as well as sovereign debt for the purpose of keeping borrowing costs low enough.
Coeure added that flexible markets, in particular an integrated financial market, needs to be the first line of defense. It’s because they are good at absorbing shocks. However, just a minor portion of the European Union's reform proposals have been approved.
A finalized capital markets as well as banking union would diversify and diminish risk by simply restricting the financial burden on authorities and taxpayers.
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