norberthaering (en-GB)

Shadow ECB Council

The ECB Shadow Council was founded in 2002 upon an initiative of Handelsblatt, the German business and financial daily. It is an unofficial panel, independent of the ECB/Eurosystem, and comprising fifteen prominent European economists drawn from academia, financial institutions, consultancies, companies and research institutes. The main purpose is to provide the public with a fuller account of the pros and cons of different policy alternatives than the ECB itself is giving, as the ECB

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tends to focus solely on the arguments in favor of the alternatives it has chosen.

The Shadow Council usually convenes by telephone conference on a quarterly basis. Its discussions are intended to formulate an opinion as to what monetary policy decision its members believe that the ECB's Governing Council ought to undertake, both at its forthcoming meeting and also on a three month horizon. Shadow Council members are encouraged to submit their own economic projections for euro area activity and inflation on a monthly basis, which constitutes the panel's forecast consensus as published each month.

The discussions and recommendations of the Shadow Council differ from surveys of economists concerning the outlook for ECB interest rates because the Shadow Council recommendation expresses the majority view of its' members opinion about what the ECB should do, rather than what they forecast it to do (and hence the "normative" views as expressed by Shadow Council members on what they consider the ECB ought to do can and often do differ from what they might say they expect the ECB to do). This "normative perspective can, however, give an early indication of shifts in the balance of opinion in the expert community.

With a short interruption, Norbert Haering was non-voting chairman of the Shadow ECB council since its inauguration in 2002.


Current members:

José Alzola (the Observatory Group), Marco Annunziata (General Electric), Manuel Balmaseda (Cemex), Elga Bartsch (Morgan Stanley), Andrew Bosomworth (Pimco), Sylvain Broyer (Natixis), Julian Callow (Barclays Capital), Jacques Cailloux (Nomura), Eric Chaney (Axa), Janet Henry (HSBC), Merijn Knibbe (Wageningen Universität), Jörg Krämer (Commerzbank), Erik Nielsen (Unicredit), Jean-Michel Six (Standard & Poor’s), Richard Werner (Southampton Universität)


Past members (selection)

Sushil Wadhwani (vormals Bank von England, Wadhwani Asset Management), Jürgen von Hagen (Universität Bonn), Marko Skreb (ehem. Gouverneur der kroatischen Zentralbank), Paul De Grauwe (Universität Leuven), Francesco Giavazzi (Bocconi Universität), Michael Heise (Allianz), Willem Buiter (vormals Bank von England, Citigroup),  Daniel Gros (CEPS), Thomas Mayer (Deutsche Bank), Giancarlo Corsetti (European University Institute), Stephen King (HSBC), Charles Wyplosz (Genfer Hochschulinstitut), Gustav Horn (IMK)


Minutes of the meeting on 7 January 2014

Members of the Shadow ECB Council evenly split over assessment of a possible Greek exit

At the meeting of the Shadow ECB Council on 27 May 2015 it became clear that the spectre of Grexit is polarizing not only policy makers but also economists. About half the members of the Shadow ECB Council would regard an exit of Greece from the currency union a very bad and dangerous outcome. Roughly the other half would consider it well manageable or even desirable.


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Inflation forecasts far below ECB projections

Compared to three months ago, the average forecast of the members of the Shadow Council for inflation this year rose to 0.3 percent, after it had declined a record 0.9 percentage points to 0.0 percent in the preceding three-month period to February. This compares to a 0.0 percent forecast of the ECB-staff from March, which came down from 0,7 percent in December. The Shadow Council’s mean forecast for 2016 went up slightly to 1.2 percent, still far below the medium-term target of the ECB of roughly 1.9 percent and also below the ECB’s March-projections of 1.5 percent.

The Shadow Council’s mean forecast for GDP-growth in 2015 increased slightly to 1.3 percent; for 2016 it stayed unchanged again at 1.5 percent. Thus, the decline of the euro exchange rate in the last half-year (and the decline of oil prices) did not materially alter medium-term growth expectations.

Shadow Council macroeconomic forecasts

(ECB’s December projections in brackets)








0.3 (0.0)

1.3 (1.5)


1.2 (1.5)

1.5 (1.9)

Contributors: M. Annunziata, E. Bartsch; A. Bosomworth; S. Broyer; J. Cailloux; J. Callow;, J. Henry, J. Krämer, F. Lindner, E. Nielsen,.


A possible Grexit is polarizing opinions

Members were split about half and half on the assessment of a possible exit of Greece from the currency union. Views ranged from this being a “grossly naïve and dangerous policy mistake” to “an orderly and managed exit is the least damaging solution for all parties”.

The main argument of the first camp was that an exit of one member would change the nature of the currency union to something more akin to the former European Exchange Rate Mechanism (ERM).While most members agreed that the ECB and the ESM had the means to prevent contagion via the bond markets from reaching dangerous levels in the short term, the pessimistic camp (on Grexit) was very concerned about the medium to long term. It was argued that once the next recession would hit some of the weaker members of the currency union, the possibility of eventual exit would be entertained by the markets immediately, which could lead to a self-fulfilling prophecy or speculative attack.

The other camp raised a similar argument with regard to the possibility of letting Greece stay in the currency union despite its government’s refusal to accept conditions attached to earlier emergency loans. There was concern that this would entice voters and governments in other crisis countries to renege on bailout conditions and that this could endanger the fabric of the currency union in the long term.

A further argument of the pessimistic camp was that – even if no outright speculative attacks would take place – economic actors and the government in weaker countries would suffer from permanently higher financing costs due to a risk premium demanded for the exit risk. The other side held, however, that this outcome would be desirable, as in their view the absence of significant country risk premia had been a contributing factor to the crisis.

Some members warned that Grexit might turn out to be (or appear to be) successful for Greece, in the sense that there might be an economic rebound after a year or so, and that this real or apparent success of exit would undermine the commitment to the currency union of voters or governments in other countries. A few members argued that Greece was in a liquidity crisis, not a solvency crisis, and thus a Grexit was easily avoidable if the Euro Group showed more flexibility in helping the Greek government over their liquidity problem.

Those holding the view that Grexit would be manageable or even desirable stressed the fact, that relatively few Greek government bonds were still held by non-Greek banks, such that contagion risk via bank balance sheets was small. They also pointed to a “slow motion run on deposits” at Greek banks, which would make them insolvent at some point anyway, and argued for capital controls to stem the exodus of euros from Greece.

There was a strong consensus, including members of both camps, that preserving membership of Greece in the EU was very important for geopolitical reasons.

No need to act on interest rates

Members largely kept their rate recommendations unchanged from three months ago, with a very large majority in favour of unchanged rates.






Rate recommendation


José Alzola

The Observatory Group



Marco Annunziata

General Electric



Elga Bartsch

Morgan Stanley



Andrew Bosomworth




Sylvain Broyer




Willem Buiter


cut to -0.25


Jacques Cailloux




Julian Callow

Catalyst Economics



Eric Chaney




Janet Henry




Merijn Knibbe

Wageningen University



Fabian Lindner




Jörg Krämer


hike to 0,30%


Erik Nielsen




Richard Werner

University Southampton

hike to 0,55%



Frankfurt, 1 June, 2014

Norbert Häring (Non-voting Chairman)

Shadow ECB Council is sceptical on size and structure of the ECB’s package

At the meeting of the Shadow ECB Council on 26 September, 2014, there was a strong consensus that strong disinflation and weak economic prospects warranted ECB action. At the same time, there was near consensus that the package of measures announced by the central bank in early September would not be sufficient and there was disagreement on their appropriateness. Many members suggested large scale

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purchases of securities, notably public bonds, and several suggested purchases of foreign assets or various forms of helicopter money. One of the 15 members argued for a further significant rate cut, three members argued for rate increases.

Minutes of the meeting on 26 September 2014

Some members of the Shadow Council made written comments during a pre-meeting discussion by e-mail. These are documented here:

Elga Bartsch: QE would not do the trick

I don’t believe that the economic situation is as bad as some observers believe. More importantly I am not convinced that broad based QE including government bonds would improve the situation materially. This is not only because it is not clear to me that QE would really cause financial conditions to ease (in fact I could see a situation where bond yield and the euro exchange rate rise in the response to a QE announcement). More importantly though I think we need to bear in mind that QE tends to have negative consequences for the financial system, notably banks but also insurance companies and pension funds. Given that the euro area is so dependent on bank finance, improving the health of the sector and providing incentives to lend should take priority. The TLTROs and ABS and covered bond purchase programmes are key steps into this direction. Not only will they make sure that bank funding costs drop materially, but also will they change the relative attractiveness of the different uses of the asset side of a bank balance sheet by only offering term funding for corporate lending. Combined with changes to the investment regulations for insurers and pension funds and importantly the capital retension rules for banks they are likely to be powerful in reviving the bank lending channel. Meanwhile the weaker euro, falling oil prices and hopefully more profound reforms should keep the recovery on track until the credit impulse kicks in more powerfully in the course of next year.

Willem Buiter: There is a lot left to be done for the ECB

TLTRO won’t have meaningful take-up until AQR-Stress Test is completed. So we’ll have to wait till the December round to see numbers bigger than euro 86.2 bn. ABS and Covered Bonds backed by mortgages largely pointless as regards qualitative easing/credit easing. Expansion of balance sheet through this kind of asset purchases only works through liability side: euro weakens as excess reserves pile up. ABS backed by SME loans are desirable, but unfortunately not available on any meaningful scale.

I favour an initiative from the ECB to get the euro area banks to issue ABS and Covered Bonds backed by periphery sovereign debt. As these would be private securities the ECB/Eurosystem could purchase them in unlimited quantities. I propose Euro 500 bn for the rest of this year, with the promise of more to follow if inflation and activity don’t pick up. If at the same time the European Commission relaxes the fiscal constraints on the periphery nations (including France), say by recalculating the structural/cyclically corrected budget deficits and finding that they are all at least 2% lower than was thought before, we could implement a form of helicopter money drop through the back door.

QE in the form of on ECB-equity-share weighted portfolio of 18 (next year 19) euro area national sovereign bonds will also be welcome and long as it is done on a sufficient scale. By the end of the year the balance sheet of the Eurosystem should be back at its June 2012 peak of euro 3.1 trillion. By the middle of 2015, it should be at least euro 4.1 trillion.

Other possible outright asset purchases by the ECB/Eurosystem (non-sterilised) could involve US Treasuries and JGBs. This would probably be the most effective way to bring down the exchange rate of the euro. Switzerland has been intervening in the foreign exchange markets (buying euros) on a huge scale, so there are precedents for non-sterilised foreign exchange purchases to weaken the currency.

As regards non-monetary policy actions by the ECB, the following: To help financially fragile emerging markets cope with the approaching increase in policy rates in the US (and the UK), the ECB could offer euro swap lines to the central banks of the fragile 5/10/12. These EMs could then use the euros to purchase additional US dollar reserves to counter exchange rate overshooting when zeroexit occurs in the US. With a bit of luck this would shame the Fed into making US dollar swap lines available to the fragile 5/10/12. This would help minimise the financial disruption associated with the unavoidable normalization of interest rates in the US and the UK.

Marco Annunziata: The ECB’s mandate has to be taken seriously in both directions

I see the latest ECB actions as fully justified because inflation is persistently below target, and the ECB’s single mandate has to be taken seriously in both directions. I regard the Eurozone’s growth outlook as poor, but not as disastrous as to require an emergency monetary policy response. Low growth is caused by a mixture of demand side and supply side factors. On the demand side, delayed balance sheet adjustments and more recently the repercussions of the sanctions on Russia play a role. Looser monetary policy can help, but to a limited extent. Fiscal policy support should be combined with tax and expenditure changes aimed at making government budgets more efficient and sustainable: in my view, given high public debt levels, we cannot simply rely on wider budget deficits. Finally, any leeway on fiscal support should be accompanied by stronger structural reforms in countries that have so far been very reluctant to take any meaningful steps. I realize this shifts the emphasis outside the ECB, but I strongly believe that what holds back Eurozone growth is weak productivity and structural rigidities.

Sylvain Broyer: Many say Draghi was wrong, but I think he was right, once again
Many observers said Draghi was wrong to deviate from script at Jackson Hole, since the Eurozone was not in a crisis regime this time. I think for my part that Draghi was right, once again. First: the only way for the ECB to inflate rapidly consumer prices in the context of deleveraging, overcapacities, flat commodities prices, narrowing markups through goods markets’ reforms and the digitalization of services, consists into lowering the EUR exchange rate. And second: the most efficient way to lower the exchange rate is to surprise markets.

Now, the new ECB package will help, but it will not be sufficient. It is unlikely that the ECB balance sheet will inflate as much as it has been announced by Draghi i.e. by 1000 bn of EUR by means of TLTROS injections, ABS and CB purchases. We have estimated that the TLTROS could boost credit up by 2 percentage points, in the case that interest rates in the periphery fully converge towards the core. This is no huge effect, with an optimistic assumption. On the other side, the depreciation of the euro since July will lead inflation up by 0.2 percentage points in one year. This is still not enough for the ECB to ensure “price stability”. I do not believe that a full broad QE will have much more effect on inflation. I think that helicopter money should be regarding attentively as an option for concerted monetary and fiscal policies.

Merijn Knibbe: The only way forward is an increase of household consumption
Aggregate demand in the Eurozone is far below medium run potential, despite a 4,5% of GDP shift in the Eurozone current account surplus during the last two years as this shift was mainly caused by restriction of demand and not by an increase of exports (even countries like Estonia are not experiencing anything like export led growth). We’re stuck in a rut, mind that the new German GDP data clearly show that Germany, too, experienced a double dip, after 2008.
Private investments have reached historical lows, government expenditure is still restricted and tax increases combined with pay cuts dampen household consumption. On top of this there is this thing called a ‘balance sheet recession’ while the long run rate of fixed investment (expressed as a % of GDP) is clearly much lower than ten, twenty, thirty of forty years ago (my guess: about 7-10% of GDP...). Something has to compensate the combination of structurally lower investments, paying down debts and curtailed government expenditure. And we can’t all run at the same time current account surpluses of 7 to 10% of GDP to do fill this gap, like the Netherlands and Germany and Switzerland did.
The only way forward is an increase of household consumption (including investment types of spending, like solar cells and the like), which means that VAT and taxes on labour have to be lowered. In an ageing society, this of course also means that cutting pensions is the wrong way to go. The pension age might be increased in countries with a medium rate of unemployment and rather disastrous demographics, like Austria and Germany. But lowering the level of pension benefits is putting the horse behind the wagon. Lower ECB interest rates clearly facilitate such policies – but governments have to enact them. Anyway: structural investment rates (SNA definition) really are lower than they used to and something has to fill the gap.
QE for the people (i.e. massive long-run low-interest refinancing of mortgage debts without refinancing fines) might be more effective than QE for the banks. Draghi would love that – governments have to enable it.

Andrew Bosomworth: QE needs to become the central policy tool

The eurozone remains mired in a liquidity trap in which the private sector continues to delever. Total net credit flows – across stocks, bonds and loans – to the private sector were negative 210 billion in the first seven months of this year. With consumer price inflation below 1.5% for over one year now and expectations for inflation derived from forward inflation swaps not reaching 1.75% until 2019, which is well beyond the policy-relevant horizon, it is fair to conclude that inflation expectations are de-anchoring from target. As such, the ECB is losing credibility.

Fragmentation in the credit market, while healing, remains a problem. Yet muted consumer and wage price inflation in non-programme countries combined with private sector deleveraging point to a deficiency of aggregate demand problem co-existing alongside the broken credit channel. If price stability is to be symmetric around the close-to-but-below-2% definition, monetary policy needs to be more accommodative.

The ECB’s reaction function is already fully operational on two levels: via the liquidity channel it is providing unlimited amounts of low-cost funds and via the credit channel it is encouraging banks to lend via TLTROs and the soon-to-be implemented ABS and covered bond purchases.

I doubt whether rate cuts, TLTROs and credit easing (ABS and covered bond purchases) will succeed in stopping private sector deleveraging and raising inflation expectations.

Indications from banks suggest the December TLTRO will be larger than this month’s auction. I estimate the combined take-up of the first two TLTROs will be 200 to 250 billion, about 50% to 60% of the theoretical maximum, and a cumulative 500 to 800 billion over the course of all TLTROs. I further estimate the stock of existing eligible ABS and covered bonds that the ECB could purchase and that would make sense to purchase at about 575 and 600 billion respectively. Realistically, the ECB ought to be able to buy between 100 to 150 bln of these securities in total, possibly a bit more if the ECB’s demand induces substantial new supply. Overall, I estimate the net impact of TLTROs and credit purchase programmes will boost the ECB’s balance sheet by between 300 to 700 billion, after deducting maturing LTROs and other securities, taking it to the 2.3 to 2.7 trillion range.

With interest rates through the zero lower bound and a lack of aggregate demand an increasing problem, I think the ECB should shift it’s reaction function to the next level and concentrate on asset purchases that actively raise the size of the balance sheet. The TLTROs and credit easing policies have been decided and should be given time to prove their effectiveness. But the ECB’s credibility is at stake so it cannot afford to allow inflation and inflation expectations to undershoot the target for too much longer. If latest by the end of the first quarter of 2015 there is still no improvement of inflation and inflation expectations, or if demand conditions deteriorate between now and then, I think the ECB should adopt quantitative easing. A QE programme of 500 billion purchases of government bonds would take the balance sheet to a level that materially compresses long-term risk premia and depreciates the currency.

Accordingly, as the next step but not necessarily immediately, I favour elevating QE to the central policy tool and returning interest rates to a minimum normal range with the Main Refinancing Operation rate at 0.25% and a 0.25% corridor around that for the Deposit and Marginal Lending Facility rates.


Julian Callow: The ECB’s goals are not well specified

The ECB's new operational target, to expand the balance sheet back to its size in early 2012, is not well specified. We do not know why it is focused on this level, nor what the implications of attaining it would be. In my view policy is in danger of becoming confusing to the markets, with different operations and yet unclear understanding about the relative size of each operation, its expected goals and implications, and how they will interact.

I think there is an important qualitative difference between central bank operations which expand funding to banks (passive QE) and the active purchase of securities (active QE).

Previously I backed an ABS programme and it is welcome to see this. I think additionally that the time has come for the ECB to announce an ESM bond purchase programme. That said, the TLTRO programme makes determination of the size of prospective new asset purchase programmes unclear, given uncertainty about bank TLTRO demand. Therefore, I think that it is preferable for the ECB to wait to see the consequences of the second TLTRO before embarking upon a new asset purchase programme.

I do welcome the recent deposit rate reduction. It is vital for the euro to continue to depreciate to support the economy, which is showing signs of softening. That said, I think Q2 GDP in the euro area was depressed by several one-off factors, and we should get some positive growth again in Q3. Likewise, I do not think deflation risks are especially strong, given wage inflation at just under 2%.

Shadow ECB Council calls ECB’s package step in the right direction

At the meeting of the Shadow ECB Council on 26 June, 2014, there was a strong consensus that the measures decided by the ECB Governing Council in early June against the credit crunch and below target inflation were going in the right direction, but only modestly effective and insufficient. Almost all members believed that additional measure were needed now or in the near future. The Targeted Long Term Refinancing Operations (TLTRO) were almost unanimously considered the most important part of


the package, even though many members considered the targeting rather ineffective. Despite its high profile in the public debate, the negative rate for bank deposits at the ECB is considered to be of mostly symbolic relevance. As additional measures, members suggested various forms of helicopter money, purchases of public bonds and purchases of asset backed securities or foreign assets.

Minutes of the meeting on 26 June 2014.

Shadow ECB Council criticises neglect of deflation danger

The Shadow ECB Council held a conference-call on 27 March, 2014 to discuss whether and which monetary policy measure would be appropriate to deal with the continued inflation undershoot and to counter the threat of deflation.  There was broad consensus that the low and declining inflation rate in the euro area as a whole and negative rates in some individual countries pose a serious problem; more serious than ECB representatives

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would admit. Five of 13 voting members advocated a cut in at least one policy rate. One member advocated a hike. Quantitative easing was discussed, but there was not consensus on whether QE should be employed right away or only if the situation deteriorated further.

My comment: While a further rate cut will not hurt, it is quite clear that it will not do much to alleviate the main problem: the shrinking of the domestic money supply due to banks’ reluctance to lend and their customers’ reluctance to take on even more debt. The ECB could and should tackle this problem directly. Since it can print as much money as it pleases, it is only lack of imagination, which can prevent it from finding ways to get more money into circulation – and lack of willingness to make it plain to everybody that commercial banks are not needed to create money and that money does not need to be as scarce as it is.

Minutes of the meeting on 27 March