Lorenzo Bini Smaghi: One size fits all? Speech by Mr Lorenzo Bini Smaghi, Member of the Executive Board of the European Central Bank, at the 16th Annual Conference of the German-British Forum “The European Central Bank in a global perspective – central banking and the challenge of rising inflation”, London, 26 May 2011. *  *  *  I wish to thank Huw Pill and Oreste Tristani for their contributions to the speech. I remain solely responsible for the opinions contained herein. Ladies and gentlemen, It is a great pleasure to speak at this German British Forum on the important issue of “The European Central Bank in a global perspective – The challenge of rising inflation”. I would like to address an issue which is raised time and again, namely, can the monetary policy implemented by the ECB fit different underlying economic performances in the Member States of the euro area? And in the current situation, the question is often asked whether the ECB’s monetary policy doesn’t risk hampering the recovery in the euro area periphery and jeopardising the implementation of the adjustment programmes. As I said, the issue is not new, but it is certainly topical. I am sometimes tempted to answer that this is not the right question, or at least that the question comes too late, given that we now have had a monetary union for more than 11 years and there are no alternatives in sight.
But, at the same time, I do not think that cross-country differences in Monetary Union, which raise the potential for persistent divergence of economic performance, can or should be ignored. Looking forward, the financial crisis and its impact on the functioning of financial markets in some countries has led to a situation in which cross-country heterogeneity owing to differences in monetary policy transmission may be more pronounced than before the crisis – at least if effective remedial measures are not taken. This new environment has posed, and will continue to pose, challenges to the single monetary policy. How is the ECB dealing with these challenges? Since the start of the financial crisis, the ECB has implemented a set of non-standard measures, taking advantage of the range of instruments available within the Eurosystem’s framework for the implementation of monetary policy. Foremost among these measures has been the adoption of a fixed rate tender procedure with full allotment in the ECB’s monetary policy operations. In conjunction with the flexible nature of the Eurosystem’s collateral framework, these measures allow banks to obtain funding even in the face of market dislocation.5 This has avoided a disorderly deleveraging of bank balance sheets and the associated potential for a fire sale-driven, vicious downward spiral in asset prices and bank capital. In the face of the sovereign debt crisis these non-standard measures, supplemented by targeted asset purchases under the ECB’s Securities Markets Programme, have addressed and contained the country-specific impediments to monetary policy transmission.