The ECB's major importance in the southern European capital market

Het Financieele Dagblad
Ivo Arnold, Vice Dean and Professor of Economic Education at Erasmus School of Economics
Erasmus School of Economics

In an opinion article in Het Financieele Dagblad, Professor of Monetary Economics at Erasmus School of Economics Ivo Arnold argues against the notion that it is necessary and easily done to fully integrate the European banking system. 

In an article in Het Financieele Dagblad of 22 December, Andrea Enria, head of banking supervision at the European Central Bank (ECB), argues that the banking sector should be much more integrated than it is now. This would allow banks in other countries to absorb the impact of large losses: 'I think politicians underestimate the positive effects of a more integrated banking sector. Look at the US. There, private risk sharing is much greater. Banks that are active across the country can absorb a shock that occurs in one state with the profits generated in other states. When the banks in Spain, Ireland and Greece ran into trouble, this crisis was solved within the banks' own markets. That is much less efficient. And then there is the point that end-users benefit from lower prices due to competition in a fully integrated, single market.'

Spreads under the influence of the ECB

However, Professor Arnold disagrees and argues that Enria's view is not nuanced enough: 'According to Andrea Enria, we do not need to worry about Italian banks' exposure to Italian government debt. Look at the spreads in the market, he says, and you will see that government debt is not that risky at all. Enria should have added: "Thanks to the ECB”. After all, without the ECB's buy-back policy, the spreads on Southern European government debt would never have been this low. As soon as any doubt arises in the market about the ECB's willingness to shore up government finances, spreads start to widen again.

The actual purpose of the ECB

Arnold: 'Obviously, a central bank can always guarantee government debt and thereby eliminate credit risk. But that's not what we agreed upon when we introduced the euro. After all, the ECB is there to ensure price stability, not to finance governments cheaply. The high concentrations of government debt on European bank balance sheets are hampering the ECB in performing this task. The macroeconomic outlook is good enough to take monetary policy out of crisis mode. But the phasing out of the purchase programme is proceeding exasperatingly slowly. The ECB fears that spreads will widen and that the depreciation of southern European sovereign debt will threaten the stability of the financial system.'

More information

You can download Ivo Arnold's Opinion article in Het Financieele Dagblad, 30 December 2021, above. 

You can read the full article from Het Financieele Dagblad, 22 December 2021, here

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