In May, the institution reduced its main refinancing rate to 1%, introduced 12-month maturity repos, a debt purchase scheme and announced that the European Investment Bank is to become counterparty in its operations. And although in June the rate remained unchanged, President Jean-Claude Trichet said the ECB would start its plan to buy 60 billion euros ($85 billion) of covered bonds in the primary and secondary markets in July.
Indeed, the European Central Bank has been sluggish in implementing new monetary policy measures. Yet, its actions have been well justified and accurate. While its main refinancing rate remains above the ones in the United Kingdom and United States, the deposit rate has been kept at 0.25 per cent, which makes money market rates lower in the Euro Area than elsewhere. Moreover, despite resisting quantitative easing, the ECB has provided unlimited liquidity to banks at the main rate, and widened the collateral it accepts. In addition, the idea of bringing the European Investment Bank to play may be very effective as the ECB money may be channeled directly to small and medium sized enterprises.
Even so, we can’t forget the ECB monetary policy implementation is much more difficult than in other countries. After all, the bank is responsible for 16 countries with very different economic conditions. For example, what is good for export dependent Germany may not be right for over-indebted Italy. Moreover, besides uncertainty over how much money should be pumped into the economy through quantitative easing there are some specific factors in the Euro Area itself which can question the influence of unconventional measures on the economy. In fact, banks play a major role in distributing credit in Europe, not securities as in Anglo-Saxon world.