Intervention in the panel: Challenges for Monetary and Fiscal Policy,
Lorenzo Bini Smaghi, Member of the Executive Board of the ECB It is a pleasure for me to contribute to this Sveriges Riksbank conference entitled “Monetary Policy in an Era of Fiscal Stress”. The subject is indeed a very topical – and global – one. Not just in Europe but around the world, the crisis has progressively acquired a fiscal dimension that may be with us for a number of years to come.
Against this background, it may be useful for me to briefly look back over the relationship between monetary policy and fiscal policies, stressing in particular the challenges that monetary policy may face in an environment of sharply rising fiscal deficits and debt. Coming from the ECB, I will of course primarily focus on the euro area experience and lessons.
If, in a simple one-country setting, sovereign debt becomes unsustainable, the central bank always retains the option – in theory and partly in practice – to monetise the debt. The short-term implication of such monetisation is that sovereign credit risk will be replaced by both an inflation and exchange rate risk. In other words, the currency of that country will no longer be considered as a good store of value, either domestically or externally.
None of the above constitutes a feasible scenario for the euro area, which is characterised by a unique combination of centralised monetary policy-making and largely decentralised, albeit closely coordinated, fiscal policy-making. This one-monetary-policy-and-many- fiscal-policies approach is at the heart of the institutional arrangement which governs the interactions between monetary and fiscal policies in the euro area. Importantly, the Treaty specifically excludes any “fiscal dominance of last resort”, due to the prohibition of monetary financing.
So what are the implications of all this?
Ruling out the possibility of monetising sovereign debt in turn rules out inflation and exchange rate risks. However, if we exclude the possibility of monetising the debt and of bailouts between countries, the risk of sovereign default could arise. Furthermore, this type of risk may emerge in financial markets in a rather disruptive way, at least compared with other risks, such as inflation and exchange rate risks. The reason is twofold. First, inflation risk may take time to materialise and to be factored in, even when the central bank monetises the debt. Second, financial markets may find it easier to manage and hedge against inflation and currency risk than against sovereign risk.
The separation between monetary and fiscal policies may create non-linearities and even multiple equilibria in the pricing of credit risk, which in turn may fuel self-fulfilling expectations and precipitate crises. Given the role that government bonds play in advanced economies’ financial markets, such instability may impair the transmission of monetary policy. This may justify targeted action by a central bank to push markets towards a more stable equilibrium.
In general, the lack of fiscal dominance and the exposure to sovereign risk should promote overall better fiscal policies. This is certainly the case for most of the euro area countries. Fiscal consolidation started already in 2010, when the euro area general government deficit-to-GDP ratio and the debt-to-GDP ratio reached around 6% and 85% respectively. This compares with a deficit of 11.2% and a debt of 92% in the US, a deficit of 9.5% and a debt of 220.3% in Japan, a deficit of 10.4% in the UK and a debt of 80%. Further improvements in the fiscal situation of all the euro area members is expected for the current year, with the euro area average coming down to slightly above 4%. The euro area debt-to-GDP ratio is expected to stabilise in 2013 and come down thereafter.
In the euro area three countries are facing severe problems regarding market access. Overall these three countries account for about 6% of the euro area GDP. I will not elaborate on these three cases, and the fact that they have emerged in the midst of the worst economic and financial crisis since World War II.
The solution to these three cases entails a specific role to be played by the fiscal authority of the respective countries, the fiscal authorities of the other countries supporting the adjustment programme in those countries and the ECB. Some commentators have said that in a crisis stronger coordination between monetary and fiscal policy is desirable, even if it comes at the expense of reducing the independence of monetary policy. The opposite is actually true. Especially in a crisis the responsibilities for monetary policy and for fiscal policy have to remain quite separate.
The reason is that it is precisely during a crisis that the fiscal authorities try to push the central bank towards solving the fiscal problem through the inflation tax. However, the central bank is protected from this pressure by its statutes and the rules it adopts for the conduct of monetary policy. In the case of the ECB, the rules specify that it can lend only to sound institutions and against appropriate collateral. The appropriateness of the collateral depends in particular on whether the country under stress follows rigorously the IMF/EU adjustment programme and is on track to regain market access. The soundness of institutions, which is assessed primarily by supervisors, is also a key principle. It has ensured that all adjustment programmes envisaged sufficient funds for the recapitalization of the banking system.
These rules and principles apply to the central bank but are ultimately there to protect taxpayers and to prevent monetary policy from being misused to bail out insolvent governments. They constrain the actions of the central bank, but also give it sufficient flexibility to react in the event of a crisis.
There is no doubt that these rules cause some frustration to those who would instead like to shift the responsibility for solving the crisis entirely to the central bank, even if the crisis is of fiscal origin.
It is quite paradoxical that the very same people who criticise the ECB for having taken too many risks during the financial crisis are also those who criticise it for opposing any form of debt restructuring. This same group even suggests that the ECB should stand ready to accept, after a debt restructuring, the signature of a default-rated government as collateral. How are such contradictions possible? In my view they are only possible when the analysis is partial or the rationale is unclear. Let me give a couple of examples.
One reason for debt restructuring – which is often made by some theoretical economists – is that it helps financial markets to function better and it eliminates moral hazard. The problem with this view is that it totally omits the broader impact on the markets. Trying to eliminate moral hazard in the middle of a systemic crisis is like shooting yourself in the foot. Think about it: did the failure of Lehman Brothers make markets work better, or worse? Did it reduce moral hazard?
Another reason for private sector involvement (PSI) is to minimise the taxpayer’s contribution and to penalise bad investments. This reason is even less economically sound. Lehman Brothers’ failure proved that if PSI is applied in the wrong way, the taxpayer will in the end pay more. Short-term speculative investors benefit from perverse forms of PSI, while long term investors are punished. That doesn’t sound very clever to me.
Having a clear objective, which in the case of the ECB is price stability, helps us to be consistent and to implement a policy which is in the best interests of taxpayers, given that inflation is ultimately a tax.
The architecture of the euro area – which clearly divides responsibilities between the single monetary policy and the many national fiscal policies – offers strong protection for taxpayers: the Treaty and the Stability and Growth Pact are intended to ensure sound fiscal policies and to guarantee the independence of the Eurosystem’s monetary policy.
Some strengthening of the institutional framework underlying the Stability and Growth Pact is needed in order to avoid any repetition of the problems we are currently experiencing. Progress has been achieved, although not as much as we would have hoped. However, looking back, it is encouraging to note that, when facing difficult choices, the political authorities of the euro area have always decided to move forward, towards greater integration and a more solid foundation for Economic and Monetary Union.
The trialogue between the Commission, Council and European Parliament has tried to finalize an agreement on the strengthening of fiscal discipline in the euro area, in time for next week’s ECOFIN Council and European Parliament plenary meetings. The Parliament is asking for a reverse Qualified Majority in the Council to vote down a Commission recommendation to a Member State with clearly unsound budgetary policy already under the preventive arm of the Pact. This should not be seen by the Member States as a reduction of their sovereignty but rather as a way to better protect themselves against the negative impact of undisciplined policies in diverging countries. It will also better protect the euro. I hope that the Council will show courage and leadership in this important endeavour.
Thank you for your attention.
Copyright © for the entire content of this website: European Central Bank, Frankfurt am Main, Germany.
Beyond Transactions: The Payment Revolution
By Marwan Forzley, CEO of Veem
The uninterrupted disruption brought on by the pandemic accelerated the need for robust, digital-first tools created to support remote teams and accelerate online commerce.
As offices across the US moved to work from home for indefinite periods, specialized back office departments handling sensitive information have had to go a layer deeper to find tailored solutions that support the transition of their in-person workflow. For finance teams, payment approvals, issuance, and general management became a challenge overnight. Particularly for those who — even in 2020 — continued to send and receive paper checks through the mail.
For years and even to this day, millions of small business owners around the world have relied on slow and confusing bank processes to manage their business finances. Every day, they spend valuable time using old, complex and expensive platforms to transact with domestic and international vendors — never knowing where their payment is or even when it arrives at its destination.
With ongoing economic and logistical uncertainty looming as we move into 2021, this old norm should not be expected for much longer. This year has seen small business owners wear more hats than ever before, and has influenced a mass adoption of online financial applications that offer heightened security, save more time, and provide more value as budgets tightened.
A study conducted by Mastercard earlier this year saw online business-to-business payments skyrocket in popularity with more than half (57%) of small business owners across North America turning to digital services since the start of the pandemic to improve cash flow and modernize their payment processes.
If this study is of any indication, the days of making an appointment with a banker or sending a wire transfer through an outdated web portal have passed. And the time for the payment revolution is here.
Putting the user in the driver’s seat
Major world events have always acted as a catalyst for innovation and change. As of a result of the growing pains we experienced this year, in 2021 businesses can finally say goodbye to huge transaction fees and bank-imposed gatekeeping when it comes to managing their financial processes.
The financial technology firms, in partnership card and local bank networks and sometimes even each other, have been building and iterating on products over the past decade that were created to work flawlessly from a desktop or smartphone.
For the first time, small businesses have access to needed, user-friendly financial tools packaged to make their lives easier. No longer reserved for major enterprises, those previously underserved by traditional banks can sign up for applications that consolidate billing, payments, working capital and more to one central dashboard.
With the owner in the driver’s seat, they can better communicate with vendors and customers and reallocate their time previously spent manually sending, receiving and reconciling payments toward growing their business — without ever stepping foot out of their home.
Genuinely seamless and automatic integrations with complimentary functions aligned to core financial activities mark a fundamental change in how businesses will choose to operate moving forward. Not only should experiences be integrated, but the entire lifecycle of the transaction should be digital.
Consider a freelance contractor that uses a time tracking and invoicing software to invoice a client. Through an integration between the time tracking tool and Veem (a complete online business payment tool) the client receives and captures the invoice within their Veem payment dashboard. Because Veem and Quickbooks are integrated partners, as soon as the invoice is received, a bill is automatically created, marked as paid, and reconciled on the client’s accounting software as soon as the funds are issued.
In this flow, the contractor only needs to send an invoice, and the client only has to approve the payment for everything else to move. Thoughtful integrations like these empower businesses to log-in to one application, but benefit from several, ultimately eliminating inefficiencies.
Understanding that old habits die hard, it’s expected that businesses of any size have questions when it comes to moving payments from a bank to an online provider.
Answering these questions with unprecedented product value and relentless transparency is the best way forward to bring more businesses onboard in 2021.
This means providing up front pricing, tracking, choice and flexibility to users. Before, during and after the pandemic, cash flow management remains the most critical part of running a small business. Digital payment providers enable the entrepreneur to have unparalleled insight, visibility, and control over their cash flow.
Through non-bank payment options, businesses can secure their information over a secure data network, watch their money move from origin to destination, and choose the speed at which they would like funds to move. By these tools working in harmony, the user can remove friction and spend more time focused on their business.
Separating the signal from the noise
2020 is a year that changed everything for the global small business community. In a report by Veem issued at the start of the pandemic, an overwhelming 80% of businesses shared that they anticipated COVID-19 to impact their business over the next 12-16 months. Problems surfaced that many didn’t even realize they had. And in finding those problems, businesses turned to technology to support them.
As enabling technology, it’s our job to listen and bring clarity and solutions to those contributing to and growing our local and global economies despite the hurdles and challenges they’ve faced.
Right now, small businesses deserve more. More access, more choice and more credit. In the road ahead we expect online payments and bundled user friendly financial services to play a pivotal role in the recovery of small businesses. The payment revolution will see the continuation of important and meaningful products that value the users time and enable businesses to launch, grow, and scale regardless of what’s to come in 2021.
The UK’s hidden payments crisis: why businesses should rethink their payments strategy
By Edwin Abl, Chief Marketing Officer at Modulr.
As the economic conditions imposed by the Coronavirus endure, businesses are facing a dilemma about how to reduce operational costs while meeting customer needs in as economical a way as possible. And all without compromising on their quality of service.
A recent survey of 200 payments decision makers across the UK, revealed there are hidden costs of payment processing which will have an exponentially greater impact on wider businesses if left untreated. It found, UK businesses are spending an average of £1.5m a year in costs attached to payments – money they simply cannot afford to lose to inefficient processes in these uncertain times.
Businesses need to plug any holes in their boat to avoid sinking. And for many this includes the examination and recalibration of their payments strategy.
The research reveals that the payments process now represents a huge 12% of a business’s total operational expenditure. With two-thirds (64%) of all businesses expecting the cost of payment processing to increase over the next two years.
Two thirds (67%) of payments decision makers surveyed believe the way they process, and service payments has had a direct impact on their customer experience. In fact, 62% of respondents believe the hidden costs of poor payments outweigh the hard costs. This indicates that a poor payments strategy is no longer something business leaders can ignore, as it now has a far greater and unseen impact on wider business mechanics.
The top three hidden costs attached to inefficient payment processes were ‘impact on customer experience/satisfaction’ (38%), ‘influence on relationships with other teams and departments (35%) and ‘impact on competitor differentiation’ (31%).
These findings suggest there is widespread consensus that getting payment operations right, directly creates performance boosts elsewhere in the business. When asked to estimate, as a percentage, the business performance boost received if hidden payment inefficiencies were resolved, the average margin for improvement was +14%, with traditional banking the sector most likely (31%) to predict a performance gain greater than +15%.
The 5 key steps UK businesses can take to drive payment efficiencies
There are five key areas payments decision makers and tech leaders should be looking to change, so that they can drive end-to-end payment process efficiencies:
1 – Locate hidden payment process inefficiencies
Visibility is a key issue. Respondents across large (46%) and small businesses (47%) say they have very clear metrics directly related to payment process costs. Only 8% say that they don’t understand the costs involved. Yet, businesses know they could do better with improved visibility of costs. Both large and smaller companies cite ‘lack of visibility for operational costs’ as the top challenge when it comes to achieving strategic goals around payment process and money services provision.
Digital banking companies, including lenders and FinTechs, identified ‘lack of visibility for operational cost’ as a challenge when it comes to increasing payment services revenue (37%). This is in comparison with all respondents mentioning other issues such as lack of skills (25%) and constrained resources (25%) as secondary and tertiary challenges respectively.
For many businesses, developing a cost model for current and projected payment process costs, both hard and hidden, is a top priority.
2 – Make payments key to stakeholder experience management
Customer, departmental and even supply chain partner experiences are increasingly intertwined. There is no doubt that customer experience is a top priority for payment services strategy. But enhancing the broader stakeholder experience is a close second, and certainly complements the former.
Employee experience affects customer experience. So, payment services innovation must extend beyond customer touchpoints. Happy employees who feel they are working with effective and efficient payments systems will be best placed to enhance the customer experience. And, employees in commercial roles who have bought into the benefits of efficient payments will naturally want to extoll those benefits to customers.
Companies with a sophisticated and integrated supply chain are likely to be the frontrunners in implementing the integrated payment services that benefit all stakeholders, due to their historic experience. As customer experience management evolves into a broader discipline of stakeholder experience management, including employees and supply chain partners, it will become more crucial than ever to include payment services experience
3 – Integrate and automate to support payment innovation
Payment innovation is driving a culture change, connecting previously siloed functions such as IT and finance. There is increasing integration of systems from customer relationship management (CRM) and enterprise resource planning (ERP), into accounts and payments. The research tells us that payment processes are impacting nearly every department, affecting areas including customer experience, brand, leadership, business agility and ultimately, revenue. Integration enables new business models for paying suppliers and customers.
Automation is key to driving efficiency, replacing manual error-prone and time-consuming processes with real-time and responsive, digital ones. This is particularly the case when it comes to operational and payment processes.
Indeed, 52% of large companies say that team hours spent on payment processes was their biggest hard cost attached to payments, compared with 26% of smaller companies who share that view. This suggests that automation could contribute more to cutting the cost of payment processes in large companies.
A host of payments-as-a-service providers (including Modulr) are supporting customers to do just this by enabling them to stream a whole unified product ecosystem of payments functionality directly into their own software.
4 – Bring business leaders together
Payments innovation is driving systems integration and creating a more collaborative stakeholder ecosystem. As all the C-level roles become increasingly focused on the customer experience, the finance remit now includes overall business operations and its associated risks and opportunities. The role is evolving beyond just accounting, tax liability and funding. Therefore, closer collaboration between senior leaders is key to driving efficiencies and enhancing customer experience.
5 – Innovate by adding finance and payments to vertical services
Companies with a vertical focus are well placed to innovate by offering new payment services. In many vertical sectors, especially employment services, software vendors are increasingly embedding financial services facilities, such as payments, into their technology platforms. Employment services SaaS providers, across payroll, accounting, bookkeeping and more are offering financial services to existing and new customers within their specific ecosystem.
This means they can develop hyper relevant, convenient and delightful financial products and services for their end users through highly flexible, ‘plumbed in’ payments. This creates an ecosystem of stickier products while boosting the lifetime value of each end user.
Moving forward – engaging technology to drive efficiencies
If the onset of the Coronavirus crisis has taught us anything, it is that there are many advantages to investing in technology and having a digital infrastructure as responsive as your customer-facing experience.
However, whilst digital technologies enable companies to provide customer service in new ways during lockdown. These same businesses are failing to transform their digital strategies, with the biggest priority still being cost reduction (41%).
By not shedding legacy technology and shoring up operational efficiency, UK businesses are following an increasingly risky strategy. And one which will have an exponentially greater impact on the wider business if left untreated. Particularly when this widespread failure to act concerns the customer experiences that sit at the very heart of a proposition – the payments.
To find out how you can drive payment efficiencies into 2021 and beyond, download the full report here for all the insight you need.
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