Bundesbank President Jens Weidmann reiterated that, if the economic recovery in the euro area continues, substantial net asset purchases by the Eurosystem beyond the agreed period will no longer be required. However, given the subdued inflationary pressure in the euro area, an accommodative monetary policy stance remains appropriate, he explained at a conference in Frankfurt am Main. The conference, which was jointly hosted by the European Money and Finance Forum (SUERF), the Global Interdependence Center (GIC) and the Bundesbank, focused on monetary and economic policy in Europe and the United States.

© Nils Thies

Looking to Europe and the United States, Mr Weidmann remarked that the US economy is further along in its business cycle, and therefore its monetary policy cycle, than the euro area. However, he believes there is much to suggest that the euro area economy is further along now than the US economy at the time the Federal Reserve Bank ended its net asset purchases. For instance, the euro area output gap – the deviation of gross domestic product from potential output – stood at 0.5% in 2017, while the US output gap amounted to 2.5% in October 2014. But he conceded that, as inflationary pressure in the euro area is still comparatively moderate at present, an accommodative monetary policy stance remains appropriate.

The Bundesbank President reminded the audience that, even after net asset purchases are discontinued, monetary policy will remain accommodative. He went on to add that the favourable economic outlook also lends credence to the expectation that wages, and therefore price pressures, will increase in keeping with a path towards the ECB Governing Council's target inflation rate of below, but close to, 2%. "The recent pay agreement in the metalworking and electrical engineering industries in Germany is consistent with this picture," Mr Weidmann explained. In his opinion, the recent appreciation of euro appears ultimately unlikely to jeopardise the economic upswing. "It is – at least in part – rather a reaction to the brighter growth prospects of the euro area," he noted. Besides, he added, recent research suggests that the exchange rate pass-through, which is to say the impact of exchange rate movements on inflation, has declined. According to Mr Weidmann, we should not allow ourselves to become unsettled by declining equity prices either, commenting that equity prices rose over a prolonged period without any notable corrections – which was unusual given that valuations have been high overall.

Chief economist and Executive Board member of the European Central Bank Peter Praet came to a similar conclusion. Speaking as part of a conference panel, he said that even major fluctuations in the financial markets are no reason for concern. "But we have to be sure that the financial stability consequences will be contained," Mr Praet continued.

Villeroy de Galhau: It is not about creating a transfer union

Another speaker at the conference was François Villeroy de Galhau, Governor of the Banque de France. He emphasised the necessity of national reforms in the euro area member states. Mr Villeroy de Galhau declared that monetary policy cannot and must not be the only way of further stabilising monetary union, highlighting the French government's reform programme in areas such as public finances and the labour market.

National reforms need to be consistent with reforms at the European level, the Banque de France Governor continued. The latter are also needed: "By the next recession [...] monetary policy will be at risk of being overwhelmed," Mr Villeroy de Galhau remarked. "This is a worry we should find a solution to in the strengthening of the economic union." However, he does not view a transfer union or Eurobonds as part of these reforms to strengthen the euro area, with necessary reforms instead including a capital markets union with incentives promoting cross-border investment, and steps to complete banking union.

US structural reform needed

President of the Federal Reserve Bank of Dallas Robert Kaplan focused on the US economy. He expects the US economy to grow by 2% to 3% in 2018. However, he believes that growth will subsequently tail off owing to unfavourable demographic developments, problems in the areas of education and productivity, spending behaviour and government debt. According to Mr Kaplan, structural reform is needed to solve these problems. Turning his attention to cryptocurrencies such as Bitcoin, Mr Kaplan said that the option to remain anonymous is contributing significantly to their success. In his view, cryptocurrencies are not going anywhere – and central banks would do well to address the topic and get even better acquainted with them.

In his speech, Axel Weber, Chairman of the Board of Directors at UBS and former Bundesbank President, discussed the latest trends in banking regulation. He believes that the euro area is better protected against shocks today than it was prior to the financial crisis. In his eyes, it is now a question of ensuring that Basel III rules take equal effect everywhere in order to create a level playing field for banks. Should this fail to happen, risks will move to wherever the rules are applied most leniently. This could end up posing a threat to financial stability, Mr Weber warned.