SOCIETE GENERALE 2014-2015 I 13 MONETARY POLICY AND SUPPORTING THE ECONOMY Following in the footsteps of the US Federal Reserve, the European Central Bank began its quantitative easing policy (QE) in early 2015. A modern take on boosting money supply, this consists of injecting massive liquidity into the markets by purchasing large quantities of securities, chiefly government bonds. With inflation at exceptionally low levels (in April eurozone inflation stood at just 0% year-on-year), QE aims to prevent European economies falling into deflation. By massively buying up public debt, the ECB is trying to keep financing costs ultra-low, boost the price of assets (the wealth effect), encourage euro depreciation, boost credit and thus raise inflation expectations. Up to now, this policy has mainly benefited the financial markets, but is expected to start having a positive effect on the real economy. At the same time, the policy it distorts asset prices, which are no longer governed by normal trade-offs between risk and return. Furthermore, it entails near-zero or even negative interest rates, which, if they were to endure, would lead to distortions in the savings markets and in the balance sheets of financial institutions. Furthermore, given their unprecedented nature, such monetary policies carry a level of uncertainty with regard to their long-term effects and the way central banks and economies ultimately exit them. AFTER MONETARY UNION, THE BANKING UNION With the financial crisis, followed by the eurozone debt crisis, it became clear that those countries sharing the same currency needed to further integrate their banking systems. As a result, the European Banking Union was created. It took a critical step forward in 2014 when the Single Supervisory Mechanism (SSM) entered into force. Through this mechanism, the ECB now directly supervises the main banks of the eurozone. This Single Supervisory Authority was put in place after an unprecedented assessment exercise (covering 130 banks in 19 countries), based on asset quality reviews and stress tests. Expanding upon the SSM, a Single Resolution Mechanism (SRM) with a Single Resolution Fund (SRF) will enter into effect in 2016, giving the eurozone the tools it needs for the orderly management of any future banking crisis that may arise, thereby ensuring the long-term stability of the sector serving the economy’s financing needs. Ultimately, a third pillar of the Banking Union will be formed by a Single Deposit Guarantee Scheme intended to replace the current national systems. Established in less than three years, the Banking Union supplements the Monetary Union and helps in the move towards a true economic and monetary union. It makes for a more robust eurozone banking system and breaks the ‘doom loop’ between sovereign and banking risks at the national level. This process will continue with the Capital Markets Union, for which a draft plan has just been launched. Discussions on creating a shared budget capacity are moving in the same direction. Finally, the trend towards growth in Europe could be boosted over the medium term by a greater integration of policies in sectors such as energy and telecommunications, as well as by shared infrastructure investment programmes similar to the Juncker Plan. “BANKING UNION MAKES FOR A MORE ROBUST EUROZONE BANKING SYSTEM AND BREAKS THE ‘DOOM LOOP’ BETWEEN SOVEREIGN AND BANKING RISKS AT THE NATIONAL LEVEL” 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS 0,4 0,2 0 -0,2 -0,4 -0,6 6 YEARS -0,8 7 YEARS 8 YEARS 9 YEARS 10 YEARS GOVERNMENT BOND (YIELD TO MATURITY, 7 APRIL 2015) France Germany Switzerland www.societegenerale.com/ economic-studies AROUND IN OUTSTANDING SOVEREIGN BONDS WITH NEGATIVE YIELDS
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