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he measures adopted by the Eurosystem to deal with the consequences of the coronavirus pandemic were presented by the Governor of the Bank of Greece, Yannis Stournaras. during his address to the 4th European Central Bank Simulation Conference.

The aim of the drastic measures was to stabilise financial markets, secondly, to ensure the flow of credit to every sector of the economy across the euro area, and thirdly, to stem negative inflationary pressures. 

Stournaras stressed the need for fiscal and monetary policy to remain accommodative and mutually reinforcing.

In detail, Stournaras said the following:

“I am pleased to welcome once again the opening of the European Central Bank Simulation Conference, the fourth in a row, organised by the ‘Get Involved’ student group and supported by the Bank of Greece, the Department of Finance and Banking Administration of the University of Piraeus and the General Secretariat for Youth.

A year has passed since the last conference, during which we all experienced unprecedented circumstances with the emergence of the coronavirus pandemic across the globe. The consequences of the pandemic have been severe, primarily in terms of loss of life, and secondarily in terms of the economic well-being of citizens. Governments in Europe, as in the rest of the world, have had to take decisive action to strengthen the public health sector and impose social distancing measures to limit the spread of the pandemic, with an additional impact on economic activity. In order to mitigate the socio-economic impact of the pandemic and the subsequent curtailment of activities, the official bodies took immediate and decisive decisions.

On the fiscal policy side, all European countries have undertaken high public expenditure to support production and employment and economic recovery. Moreover, at the collective level, the European Union’s long-term budget, together with the creation of the European recovery instrument Next Generation EU (NGEU), represents the largest package of economic recovery measures (totalling €1.8 trillion) ever financed in Europe to support workers, businesses and governments.

On the part of the Eurosystem, which is the system of national central banks, including the Bank of Greece, which together with the European Central Bank conduct monetary policy in the euro area, we have taken exceptional and drastic monetary policy and banking supervision measures to address three challenges: first, to stabilise financial markets; second, to ensure the flow of credit to every sector of the economy throughout the euro area; and third, to prevent the emergence of a new and more efficient system of monetary policy and banking supervision.

At the meetings of the Governing Council of the European Central Bank, as early as last March, when the first signs of the new crisis appeared, we took immediate and decisive decisions to maintain favourable financing conditions and facilitate the provision of credit, alongside the measures that preceded the pandemic, such as the zero interest rate on banks’ main refinancing operations and the negative interest rate on the deposit facility for banks.  

More specifically, we decided to immediately implement a Pandemic Emergency Purchase Programme (PEPP) to play a dual role, contributing to both market stability and monetary easing. 

In order to achieve the first objective, i.e. to smooth the financial disturbances, the PEPP was designed with innovative flexibility in the composition of markets to ensure effective transmission of monetary policy across the euro area. In particular, the total value of the securities purchased can fluctuate over time according to prevailing financial conditions, rather than remaining constant on a monthly basis. In addition, while the allocation of purchases of public sector securities across euro area countries should be based on the key for each national central bank’s participation (depending on the size of its economy) in the European Central Bank’s equity capital, national central banks have been given discretion to make temporary purchases that deviate from this key. This addresses the difficulties in the monetary policy transmission mechanism resulting from the shift towards safe-haven securities due to uncertainty and prevents the risk of fragmentation of the euro area. 

Why is flexibility so important for the effectiveness of the emergency purchase programme? At the beginning of the pandemic, the impact was particularly severe in some European countries, while in others it was comparatively milder. Because of this variation, the first countries experienced a strong climate of anxiety, with high volatility in their financial markets, and their government bond yields rose sharply. In the other countries, on the other hand, yields rose more gently. As a result, the spreads between the yields of government bonds issued by the first countries and those of the other countries soared to high levels. The bond markets under the PEPP, which give greater weight to the bonds of the most affected countries, have managed to drastically reduce the yields of the government bonds of these countries, and to narrow the spreads between their yields and those of the other countries. 

Of particular importance for the stabilisation of financial conditions in Greece was the granting of a waiver from the minimum credit rating requirements of the existing Public Sector Purchase Programme (PSPP) for Greek government securities to be included in the extraordinary PEPP. This decision demonstrates in practice the effectiveness of the flexibility of the PEPP, as Greek government bond yields have already fallen drastically since the announcement of the programme and are now at lower levels than in the pre-pandemic period. With a view to ensuring the uniformity of monetary policy across the euro area, it is appropriate to continue to accept Greek government securities for purchases under the PEPP, but also as collateral in bank refinancing operations, even though they do not meet the credit rating criteria, as decided in April, together with additional measures to relax the requirements for acceptable collateral from banks.

The second role of the PEPP is to further ease monetary policy on top of what has already been achieved with the expanded Asset Purchase Programme (APP) implemented since 2015 in response to the then financial crisis. By buying bonds directly from banks, but also from corporates, we are making more capital available to them. In this way, borrowing costs are reduced, banks are able to increase their credit flow, and consumption and investment are stimulated. As a result, we are contributing to economic recovery and to achieving inflation rates at levels consistent with price stability. More specifically, the value of securities held by the Eurosystem under the APP currently stands at almost €3 trillion, including the additional purchases we decided in March (€120 billion by the end of 2020). This amount is boosted by the value of the securities purchased under the PEPP and exceeds €700 billion in 2020. Net purchases of securities under the emergency programme will continue flexibly at least until the end of March 2022 and in any case until the pandemic crisis is deemed to have passed, up to a total amount of EUR 1.85 trillion, as decided at the Board of Governors’ meeting of 10 December assessing the ongoing negative impact of the pandemic on inflation and economic growth. In addition, due to the need for extended support, we have determined that principal amounts from the redemption of acquired securities will be reinvested at maturity at least through the end of 2023. 

To ensure that banks have the necessary liquidity and funding to provide loans at favourable interest rates to households and businesses, we considered it necessary to undertake additional, exceptional longer-term refinancing operations for banks in response to the pandemic (PELTROs) and to substantially improve the terms of the third series of targeted long-term refinancing operations (TLTRO-III). In these long-term operations (whose total funding volume currently stands at €1.75 trillion), the lending rate of banks was set at negative levels, which in the case of TLTRO-III could be as low as -1% as long as banks keep the growth rate of lending to the private sector stable (PELTROs: -0.25%). In addition, in order to facilitate banks’ participation in these operations, which will take place until the end of 2021, we considered it appropriate to make the requirements for banks’ eligible collateral less stringent and to temporarily broaden the range of securities eligible as collateral. Combined with the relaxation of prudential rules, for example by allowing banks to operate with a lower capital adequacy ratio for the pandemic period and to show greater tolerance for loan repayment defaults, as well as by providing government guarantees on loans, the monetary policy measures I have outlined above are instrumental in protecting borrowers and supporting credit expansion.

By taking these measures since the onset of the pandemic, the Eurosystem’s balance sheet has soared from around €4.7 trillion at the beginning of the year to over €6.9 trillion in December (in the same period, the Bank of Greece’s balance sheet has grown from around €110 billion to around €175 billion). The effectiveness of direct and substantial monetary intervention can be seen from the normalisation of financial conditions and the strengthening of macroeconomic fundamentals. Based on estimates by the European Central Bank , the package of measures is expected to increase the GDP growth rate in the euro area by 1.3% and inflation by 0.8% in the period 2020 – 2022, while helping to preserve one million jobs. Without these decisions we would have had much lower growth rates and more negative inflation rates than we see today. 

However, we should not be complacent. We are currently experiencing the second wave of the pandemic, which is again increasing uncertainty among citizens. We expect this uncertainty to remain high until the effective and widespread use of the vaccine, which is expected in mid-2021. Until then, the necessary social distancing measures intensify the economic impact of the pandemic and make recovery more difficult. For these reasons, fiscal and monetary policies need to remain accommodative and mutually reinforcing, continuing to support citizens’ incomes, production and consumption across the euro area. The members of the Governing Council stand ready to appropriately adjust the tools of the European Central Bank to ensure that inflation moves steadily to levels consistent with our objective of price stability and that the euro area economy recovers. 

In parallel with the monetary policy decisions we take by assessing financial conditions and current developments in macroeconomic aggregates, we have been reviewing our monetary policy strategy since the beginning of the year. The purpose of the review is to ensure that our strategy is appropriate to fulfil our mandate to maintain price stability. The previous review of the strategy was carried out in 2003 and since then there have been fundamental developments worldwide that make it necessary to redefine our strategy. In particular, there has been a drastic reduction in the ‘natural’ interest rate (i.e. the rate at which the stance of monetary policy becomes neutral), limiting the scope for expansionary policy through the ‘traditional’ reduction in policy rates, which have been set at historically low levels. In addition, developments such as changing financial structures and rapid digital transformation (including digital currencies), climate change, globalisation, as well as slowing productivity and the continued ageing of the population, pose new challenges for central banks.

One of the key issues we will review is the desired level of inflation to which we should aim in order to ensure price stability in a perfectly symmetric way, thus reducing downward deviations of inflation from the target. We will also assess what is the appropriate methodology for measuring inflation and the methods for analysing economic and monetary developments. Of great importance for our immediate and effective response to possible future disturbances is an understanding of how inflation expectations are shaped and the integration of the non-conventional monetary policy instruments that we have activated in recent years into our permanent toolbox. Finally, it will be necessary to incorporate the lessons from recent crises and the need to respond to new challenges so that our strategy is as constructive as possible both now and in the future.

Work on the review of our strategy is expected to be completed next year, taking into account the views of the wider public, as we want all citizens to understand our mission and decisions. 

That is why your responses to the following questions are of particular importance:

• What does price stability mean to you?  
• What are your economic expectations and concerns? 
• What other issues are important to you? 
• What are your other concerns? What are your other priorities? 

We look forward to hearing your views through your participation in the Simulation Conference, the summary of which will be considered by the Governing Council of the European Central Bank. You can also follow the related events currently organised by the Eurosystem. 

An online event of the European Central Bank has already taken place on Wednesday 21 October, with the participation of representatives of civil society, in which President Christine Lagarde and Chief Economist Philip Lane took part. The event was webcast live and the European Central Bank subsequently published a summary of the discussions. In addition, the European Central Bank gave all citizens the opportunity to express their views through the ECB is listening to you web portal, where stakeholders answered a series of questions about their views on the economy and their expectations of the central bank. 

In early 2021, we plan to organise our own event at the Bank of Greece, entitled “The Bank of Greece listens to you”, with the participation of social partners and with the aim of promoting dialogue on monetary policy strategy.

In conclusion, I would like to congratulate all those who contributed to the realisation of this conference”. 

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