Euro Area Monetary Policy: Consequences for Emerging Europe

Friday, September 15

Mislav Brkić, Croatian National Bank
Mario Holzner, The Vienna Institute for International Economic Studies
Martin Feldkircher, Oesterreichische Nationalbank
Gilles Noblet, European Central Bank

Franz Nauschnigg, Oesterreichische Nationalbank


Over the last few years, the European Central Bank (ECB) has adopted a comprehensive package of nonstandard monetary policy measures to ease financing conditions in the Euro area, support economic recovery, and accelerate the stabilization of inflation at levels below but near 2%. The JVI and the Austrian National Bank (OeNB) on September 15 convened a panel, chaired by the OeNB’s Franz Nauschnigg,  to explore the consequences and implications of the new policies. The discussants were the ECB’s Gilles Noblet, Mislav Brkić from the Croatian National Bank, OeNB’s Martin Feldkircher, and Mario Holzner from the Vienna Institute for International Economic Studies. These were some of the main points made:

Spillovers and risks
Mr. Noblet was of the opinion that the new policies, most notably the asset purchase program, have been instrumental in easing monetary policy at the zero lower bound, and have successfully boosted economic growth and inflation prospects in the euro area, but recognized they had had  spillover effects on other countries. For Central, Eastern, and Southeastern Europe (CESEE), Mr. Noblet argued, through a combination of trade and financial channels the overall effect has been positive, given how highly synchronized with the Euro area business cycles in the region are.

Mr. Brkić, who provided a CESEE perspective, agreed that emerging Europe has benefitted from higher domestic demand in the euro area and from more favorable financial conditions, noting especially that his government’s borrowing costs were now lower. In his view, the main risk was a possible deterioration in financing conditions once the easing ends, though the underlying recovery in the Euro area—and the business cycle correlations Mr. Noblet had observed—should facilitate the transition.

Transmission channels
Mr. Feldkircher presented results from a recent OeNB study that helps disentangle the various channels of ECB policy transmission. Among the findings were that lower term spreads in the Euro area had had little effect on CESEE inflation but had triggered an increase in industrial production, a rise in equity prices, appreciation of local currencies against the euro, and a decrease in long-term yields. He did point out that there is considerable variation among countries, and that the spillovers were stronger in both countries with a history of booms and busts and those with deeper integration with the Euro area.

Issues playing out over time
Finally, Mr. Holzner distinguished between the near-term outlook and challenges for the medium- to long-term. He viewed recent developments in the Euro area as positive for emerging Europe, notably the recent appreciation of the euro against the dollar, which has been driven in part by improved fundamentals. He was also of the view that the return to more conventional monetary policy in the near term would not have huge effects because initially interest rates would remain low. He was concerned, however, about what could happen in 3 to 4 years once interest rates normalize, because that could affect the dynamics of both domestic and external debt in some CESEE countries.

Underlying vulnerabilities
What to make of this rich and varied discussion? Although the assessments were generally positive, given the complexity and uncertainties related to how ECB policies may affect Euro-area neighbors, a recurring theme throughout the discussion was that sound domestic fiscal and financial policies are essential for building resilience to changes in external financial conditions.

Rafael Portillo, Senior Economist, JVI

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