Although tail risks were finally averted thanks to the agreement between Greece and the other euro area countries on a third programme, this episode highlighted the fragility of the euro area and reaffirmed the need to complete our Monetary Union...President Mario Draghi .. ECB

07/04/2016                                        Publications

Annual Report 2015

 Read full Report HERE

Foreword

2015 was a year of recovery for the euro area economy. Inflation, however, remained on a downward path.
Against this backdrop, a key theme for the euro area in 2015 was strengthening confidence. Confidence among consumers to boost spending. Confidence among firms to resume hiring and investing. And confidence among banks to increase lending. This was essential to nurture the recovery and underpin the return of inflation towards our objective of below, but close to, 2%.

As the year progressed, we did indeed see confidence firming. Domestic demand replaced external demand as the motor of growth on the back of rising consumer confidence. Credit dynamics began recovering for the euro area as a whole. Employment continued to pick up. And fears of deflation, which had stalked the euro area in early 2015, were dispelled entirely.

As we describe in this year’s Annual Report, the ECB contributed to that improving environment in two main ways.

The first and most important was through our monetary policy decisions. We took action decisively throughout the year to ward off threats to price stability and ensure the anchoring of inflation expectations. That began in January, with our decision to expand our asset purchase programme (APP). It continued with the various adjustments to the programme throughout the year, such as the expansion of the list of issuers whose securities are eligible for purchase. And it concluded with our decisions in December to cut our deposit facility rate further into negative territory and to recalibrate our asset purchases.

These measures proved effective. Financing conditions eased considerably, with bank lending rates falling by around 80 basis points in the euro area from mid-2014 onwards – a pass-through equivalent to a one-off rate cut of 100 basis points in normal times. Growth and inflation benefited too. According to Eurosystem staff assessments, without the APP – including the December package – inflation would have been negative in 2015, more than half of a percentage point lower in 2016, and around half of a percentage point lower in 2017. The APP will raise euro area GDP by around 1.5 percentage points in the period 2015-18.

We recalibrated our policy at the end of the year due to new headwinds from the global economy, which tilted the inflation outlook to the downside. Those headwinds intensified in early 2016, requiring a further expansion of our policy stance. In March 2016 the Governing Council decided to expand the APP in both size and composition (including for the first time corporate bonds), to cut the deposit facility rate further, to introduce a new series of targeted longer-term refinancing operations with powerful incentives for banks to lend, and to strengthen its forward guidance. These decisions reaffirmed that, even when faced with global disinflationary forces, the ECB does not surrender to excessively low inflation.

The ECB’s second contribution to confidence in 2015 was to address threats to the integrity of the euro area. These mainly concerned events in Greece in the first half of the year. Uncertainty about the commitment of the new government to its macroeconomic adjustment programme led to both banks and the government losing market access, and to depositors stepping up withdrawals of their money from banks. The Eurosystem provided a lifeline to the Greek banking system through its emergency liquidity assistance (ELA).

The ECB acted in full independence according to its rules. That meant, on the one hand, ensuring that we did not provide any monetary financing to the Greek government and that we only lent to banks which were solvent and had sufficient collateral, and on the other, ensuring that decisions with far-reaching implications for the euro area were taken by the legitimate political authorities. The approach we followed was fully within our mandate: it respected the commitment to the single currency contained in the Treaty, but we implemented that commitment within the limits of our Statute.

Although tail risks were finally averted thanks to the agreement between Greece and the other euro area countries on a third programme, this episode highlighted the fragility of the euro area and reaffirmed the need to complete our Monetary Union. To that end, as one of the so-called “Five Presidents”, in June 2015 I contributed to a report making concrete suggestions for further reform of the euro area’s institutional architecture. If we are to achieve a more robust union – and to avoid overburdening the central bank – those suggestions must ultimately be turned into actions.

Finally, in 2015 the ECB also strengthened confidence in its own decision-making processes by enhancing its transparency and governance. In January we began publishing the accounts of our monetary policy meetings, which has given the outside world a clearer insight into our deliberations. We also started publishing ELA decisions and the amounts concerned, data on TARGET2 balances, and the calendars of the Executive Board members. In a time of unconventional monetary policy, these steps forward in transparency are essential to ensure our full accountability to the public.

Our governance was improved too through a project aimed at optimising how the ECB functions as we expand into new tasks and confront new challenges. In 2015 we began implementing several of its recommendations, notably appointing for the first time a Chief Services Officer to support the internal organisation of the bank.

2016 will be a no less challenging year for the ECB. We face uncertainty about the outlook for the global economy. We face continued disinflationary forces. And we face questions about the direction of Europe and its resilience to new shocks. In that environment, our commitment to our mandate will continue to be an anchor of confidence for the people of Europe.

Frankfurt am Main, April 2016

Mario Draghi President




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