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EU Monetary Policy (ECB) and InvestmentPolicy (EIB)
SOME BASIC CONCEPTS03.24.2015
.. The main activity of monetary expansion (ECB) and
investments (EIB) may be similar: “INJECTING
MONEY IN THE ECONOMY”
.. However, the main policies to which these
activities respond are different:
- Monetary policy (ECB)
- Investment policy (EIB)
Monetary expansion
and investment policy
.. Annual lending 2013: 71.7 bn €
.. Capital 2013: 243 bn €
.. Geographical scope: EU (90% of funding) and other
countries (10%)
European Investment Bank
(EIB)
.. Fund managed by the EIB
.. Ownership: EIB (majority shareholder) / European
Commission / Public and private financial
institutions.
.. Capital: 3.000 m €
.. Main objective: Venture capital for small and
medium enterprises.
European Investment Fund
.. Activity: Mainly loans, but also guarantees,
microfinance, equity investment, etc.
.. EIB usually finances one third of each project, but
sometimes it can reach 50%.
EIB
A. DIRECT LOANS
- Investments larger than 25 m €.
- Up to 50% of total cost. Usually, a third.
B. “INTERMEDIATED” LOANS.
- Loans to local banks and other intermediaries
who will reinvest in loans for businesses, local
and national governments and public entities.
The EIB does not contract with the final
recipient, but this recipient must be informed
about the origin of the funds in the EIB.
EIB
Loan Modalities
.. While the ECB is the main decision maker,
monetary policy is articulated through the
“Eurosystem”.
.. Eurosystem: ECB + National Central Banks
ECB
Eurosystem
National Central Banks
and Eurosystem
ECB Capital distribution
Video
Standard instruments (6 min.)
VIDEO: Standard instruments
Long Term Programs
LTROs
2011-2012
ASSET PURCHASE PROGRAM
2015-2016
- 1 trillion €
- Loans to European banks
- Term: 3 years
- Rate: 1%
- 60.000 Million € / month
(“At least” 1,14 Trillion €: 11% /
Eurozone GDP)
- Public and private securities
- “Shared Risk”: 20%
- Non shared risk: 80% (national
central banks).
A. MONETARY EXPANSION VS. RESTRICTIVE
POLICIES
B. DIFFERENT VIEWS AND INTERESTS BETWEEN
MEMBER STATES
C. MONETARY RISK – FISCAL RISK
D. BANKING SECTOR – REAL ECONOMY
E. PUBLIC SECTOR - PRIVATE SECTOR
Monetary Expansion
POLITICAL ISSUES
.. Two main reasons for limiting risk in Eurosystem
operations:
- Prestige / reputation: Eurosystem solvency
may be key for the reputation of the Euro
itself.
- “Risk sharing”
Risk policy
.. “Central banks cannot bankrupt”. Why?
.. If necessary, ECB can pay its debts just issuing new
currency.
.. ECB debts are not debts against the ECB itself but
rather against the European economy.
.. So, risks accepted by central banks use to be
“monetary” risks, affecting the value of the currency.
Risk policy
.. However, the European monetary sistem is a
“mixed” one.
.. Risks taken by national central banks are not
“monetary” risks but “fiscal” risks. Their deficits
cannot be covered by currency emission. If
resources are needed, their respective
government should provide them.
Risk policy
Eurosystem. Loss absorption capacity in
European central banks.
(billions €) 2013
.. In order to be able to act quickly through
expansionary or restrictive decisions if necessary,
ECB investments should be liquid enough.
.. Two main instruments for that:
a) Limited terms
b) Easy to liquidate assets (Securities)
Liquidity risk
.. Key interest rates are, by themselves, main tools
for expansionary or restrictive monetary policies.
.. In theory, providing lower interest rates for
productive investments identified by EIB could be
by itself a way to promote a stronger relationship
between monetary expansion and industry or real
economy.
Interest rates
.. EIB: close to retail rates.
.. ECB: “key” interest rates.
.. So, it could be an opportunity to provide real
economy loans with lower rates
Interest rates
EU Monetary Policy (ECB) and InvestmentPolicy (EIB)
SOME BASIC CONCEPTS03.24.2015
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