BBVA Executive Director José Manuel González-Páramo predicts that the European Central Bank’s (ECB) monetary policy will normalize next year. He estimates that the ECB will announce a slower pace for asset purchases in the fall. “I wouldn’t be at all surprised if we saw the first interest rate hike at the end of 2018,” he said, during the Círculo de Economía meeting in Sitges.
José Manuel González-Páramo, who was a member of the ECB Governing Council from 2004 to 2012, feels that the leading role played by the ECB has given some countries an excuse to delay making much-needed structural reforms in their economies. In his opinion, governments will have to go back to reform agendas when the stimulus is removed.
In his presentation at the 33rd Annual Meeting of the Círculo de Economía in Sitges, BBVA’s Executive Director was optimistic about the future of Europe. Given the favorable current situation, “we have a fantastic window of opportunity this year,” to make progress in European integration, he said during the panel discussion on “Economics, finance and monetary policy: international perspectives and Europe.” However, he called for caution with respect to some of the risks that lie ahead.
We have a fantastic window of opportunity in Europe this year
From left to right: BBVA Executive Director José Manuel González-Páramo,
Positive momentum has consolidated
According to José Manuel González-Páramo, “the economy is getting stronger.” BBVA Research estimates that the eurozone GDP will grow at a rate of 1.7% in 2017 and 2018. BBVA’s Executive Director recognized the value of this in a complicated geopolitical environment, “amid an extremely intense election cycle,” as well as Brexit, the refugee crisis, anti-European political movements and the new U.S. administration.
What challenges must Europe face? In his opinion, Europe has three types of challenges: 1) institutional and economic 2) monetary policy and 3) financial.
The banking union: unfinished business
In terms of institutional and economic challenges, he stressed that starting in September “there will be a window of opportunity” with no elections in sight. Despite the imminent departure of the United Kingdom from the European Union, José Manuel González-Páramo indicated that “Europeanism is instinctive in citizens and we need to accompany this with actions from the authorities and a discourse that explains what it means to be European.” Regarding the future of the bloc, “I could not be more optimistic about the euro,” he said, although there will be challenges in the future. In this regard, he reiterated that the end goal is to have a real “multi-speed” political and economic union in Europe.
Europeanism is instinctive in citizens and we need to accompany this with actions from the authorities and a discourse that explains what it means to be European
The banking union is another challenge. Despite the progress made so far, he stressed that the project remains incomplete due to the lack of a single deposit guarantee fund for eurozone banks and public, common financial backing for the Single Resolution Fund. Three elements also remain to complete the architecture of the European Economic and Monetary Union (EMU): deepening the economic union, streamlining the fiscal union and achieving greater democratic participation and parliamentary control in the political union.
Moving toward the normalization of central bank policies
In terms of monetary policy challenges, José Manuel González-Páramo maintained that “central banks are in a phase of normalizing their policies.” In other words, they are starting to consider withdrawing unconventional policies, or have already started to do so, as is the case of the U.S. Federal Reserve.
The Federal Reserve is leading this process, first by very gradually cutting back on its asset purchasing program and second, by raising interest rates. “The ECB is probably more cautious than the Federal Reserve,” he said. Nevertheless, if the economic recovery continues and inflation (especially core inflation) reaches the target, this debate will eventually surface. José Manuel González-Páramo noted that “there will probably be a slight change in [ECB] communication” and “further cuts to asset purchases in the fall.” “Starting in 2018, these purchases may have stopped completely, and I wouldn’t be at all surprised if we saw the first interest rate hike at the end of 2018,” he stated.
There will probably be a slight change in [ECB] communication and further cuts to asset purchases in the fall. Starting in 2018, these purchases may have stopped completely
In the financial sphere, José Manuel González-Páramo warned that “we are still in a highly fragile environment.” “There is a big disconnect between the economy and the financial environment.” Despite this rather optimistic take on the markets, he recalled that “we are at volatility levels similar to those in the early 1990s,” with latent political and economic risks in Europe, and in the global context. The United Kingdom´s exit from the European Union or the adjustment of the Chinese economy are two examples.
BBVA’s Executive Director participated in the panel discussion, together with Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, in a session presided by Teresa García-Milà, Director of the Barcelona Graduate School of Economics and Vice President of the Círculo de Economía.