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