This morning, in my capacity as vice-chairman of the British Polish Chamber of Commerce, I had the pleasure of having breakfast with Marek Belka, President of the National Bank of Poland. The title of Professor Belka’s talk to BPCC members was “Monetary policy in times of crisis – the case of Poland”. What did we learn?
The first thing we learned – after a canter through the differing historical influences motivating central bank policy in the US, the UK, Germany (now the ECB) and Poland (an objective of keeping inflation down or employment up or both) – was that, rather fortunately for Poland, Professor Belka had to talk about a financial crisis not in Poland but elsewhere, this time in the Euro zone. Poland, despite its treaty obligations requiring it ultimately to adopt the Euro has not yet done so and is therefore, like the United Kingdom, not directly affected by the crisis, although no country is able to remain wholly immune from the chaos affecting its trading partners.
The second thing we learned was that the non-conventional measures being undertaken by the European Central Bank (as intellectual heir to the Bundesbank): providing long term liquidity for banks; liberalising the rules on collateral accepted by the ECB and the securities market programme are broadly accepted by the NBP as being necessary to restore the link between the interest rates actually payable on sovereign paper and ECB interest rate policy. Given the crisis the additional ECB policy of outright monetary transactions whereby certain sovereign debt is purchased on the secondary market if a country applies to be part of the programme and accepts certain fiscal measures and structural reforms is also accepted as being necessary to restore confidence. In fact, according to Professor Belka this is already having an effect as the mood appears to have changed from asking how individual countries might conceivable redenominated their currencies in non-Euro terms to suggesting that the measures might not succeed which is, in fact, a positive change of sentiment. The ECB is saying in effect that although this new policy is not without risks, it will not let the Euro collapse. Of course, ultimately there is no real sanction for countries which sign up to the OMT programme and do not then put in place the structural and fiscal changes. In this case would the ECB really let the country collapse? – unlikely. And to those who would raise the question of moral hazard, the Professor would answers that moral hazard is better than death. In fact, interestingly, even in those countries at the edge of the precipice and where folk have taken to the streets, for example Greece, there is little real support for actually leaving the Euro since most folk consider that that would be an even greater evil. Notwithstanding they may not wish to leave, it is the case that it may be attractive for Poland to remain outside the Euro zone for the time being.
But, with shades of the last time I heard Professor Belka speak at breakfast, in Muddling Through, it seems that the real reason Poland supports these measures is that the more the ECB does now, the less Poland will be called upon to do in the future. There is danger of increased inflation but this does not so much, in the Professor’s view, come from the ECB as from the quantative easing of the US Federal Reserve which feeds speculation in commodities. The collapse of the Euro would be a big blow to the Polish economy so professor Belka is keeping his fingers crossed tat the ECB programmes are successful as long as Poland does not have to follow suit. And how will we know when the corner has been turned? – once the Spanish economy stops shrinking.
During the question and answer section there was, inevitably, a reference to Amber Gold (please see Gold). As I suggested, deposit taking is a banking activity that needs a licence and therefore attracts central bank interest but the risk of other investments – notwithstanding that the public may have been mislead – falls on the public and is not an issue of monetary stability but rather once of consumer protection.
All in all a very interesting perspective on the Euro zone financail crisis as seen from the NBP but it remains to be seen how effective policy will be once Poland is not simply able to “sit this one out”.