Vítor Constâncio: Laudatio for Professor Kenneth Rogoff, recipient of the 2011 Deutsche Bank Prize in Financial Economics Speech by Mr Vítor Constâncio, Vice-President of the European Central Bank, at the Laudatio for Professor Kenneth Rogoff, recipient of the 2011 Deutsche Bank Prize in Financial Economics, Frankfurt am Main, 22 September 2011. *  *  *  Ladies and Gentlemen, It is a great pleasure to address a few words to mark the awarding of the 2011 Deutsche Bank Prize in Financial Economics to Professor Kenneth Rogoff of Harvard University. I will recall some of Professor Rogoff’s outstanding contributions to economics and financial economics, and I will also comment on some of his research in the context of the responses to the current crisis. Let me first emphasise that research plays a crucial role for the Eurosystem – just as it does for other central banks. Indeed, research has provided an essential input to the definition of the ECB’s price-stability monetary policy strategy. I would thus like to express my appreciation to Professor Rogoff for the influential contributions he has made in many fields of special relevance to central bank policymakers, ranging from monetary policy to international finance and financial crises. He merits particular praise for helping us to improve our understanding of some of the main causes and mechanisms behind the links between financial crises and sovereign debt crises.
Sustained buying of government paper by the central bank would only postpone problems and delay the necessary fiscal adjustments, ultimately resulting in a build-up of inflationary pressures. The ECB has never hesitated to reaffirm and remind all Member States, in very concrete terms, that compliance with the principles of budgetary discipline is absolutely fundamental. Naturally, since member states do not control their currency alone, they are vulnerable to liquidity episodes and multiple equilibria. Creditors’ assessments can change, e.g. via contagion effects, even when the fundamentals would not justify it. The high degree of financial integration within EMU means that, if left unchecked, contagion in the banking sector can spread rapidly via cross-border holdings of sovereign debt. For the sovereigns themselves, sudden shifts in market re-pricing of risk can lead to unexpected liquidity challenges. These dynamics underscore the importance of strengthening the mechanisms that prevent such risks – the SGP, surveillance of broader macroeconomic imbalances and stronger financial supervision. However, the liquidity dry-ups and the contagion risks also call for stronger backstop mechanisms, to provide significant, albeit temporary, liquidity assistance. The SMP aims to create a better functioning transmission mechanism of monetary policy to all parts of the monetary union and is therefore in full compliance with the prohibition of monetary financing. Also, we sterilise the impact of the SMP on our total liquidity provision.