Europe’s next crisis may test ECB limits, push rates lower: Coeure

BRDO PRI KRANJU, Slovenia (Reuters) – Europe is not ready for another economic downturn and the next crisis could test the limits of the European Central Bank, potentially pushing interest rates much deeper into negative territory, ECB board member Benoit Coeure said on Friday.

Having fought off Europe’s debt crisis with a 2 trillion euro spending spree, some ECB officials are concerned that governments have used their time poorly, failing to improve the bloc’s shock absorption capacity and leaving it vulnerable to future shocks.

Arguing that many of the institutional failings that caused the last crisis are still unresolved, Coeure warned that even a small downturn could create large economic and social costs.

“The next crisis may well force the ECB to test the limits of its mandate,” Coeure, one of ECB President Mario Draghi’s top deputies, told a conference in Slovenia.

“Depending on the nature of the next crisis, policy action might require taking short-term rates much deeper into negative territory,” he said. “Or it might require purchases of assets that are riskier than public or corporate debt. Or it may draw us dangerously close to monetary financing of governments.”

Although the ECB has already reduced its stimulus measures since the height of the crisis, its deposit rate stands at a record low of minus 0.4 percent and it holds more than two trillion euros worth of sovereign and corporate debt, all with the aim of keeping borrowing costs super low.

Coeure argued that flexible markets, including an integrated financial market, should be the first line of defense because they absorb shocks efficiently. But only a fraction of the European Union’s reform proposals have been accepted.

A finalised capital markets and banking union would also diversify and reduce risk by limiting the financial burden on governments and taxpayers, Coeure argued.

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