(Bloomberg) -- The European Central Bank's efforts to keep euros flowing through the global financial system helps monetary stimulus reach the euro zone's real economy as well as strengthening the currency's international role, according to Executive Board members Isabel Schnabel and Fabio Panetta.
“By broadening the scope of liquidity arrangements with non-euro area central banks, the ECB ensures the smooth transmission of its monetary policy to all parts of the euro area,” the policy makers wrote in a blog post. “Providing a reliable backstop in distressed market conditions also raises the euro's attractiveness for global transactions, thereby fostering its role as a leading international currency.”
Since the pandemic struck, the ECB has spun a web of support lines for countries outside the currency area to prevent any market turbulence stemming from a sudden surge in demand for euros.
It agreed swap lines with Bulgaria and Croatia and bilateral repos with Hungary, Albania, Serbia, Romania, as well as the Republic of North Macedonia and San Marino. In addition, it set up a precautionary facility in June that can be tapped in exchange for euro-denominated government bonds or supranational debt from the euro area.
That latter facility “will help to address potential market dysfunctions in case of unfavourable pandemic-related developments, such as a second wave of infections,” Schnabel and Panetta wrote. “While markets have calmed somewhat, the overall economic situation and outlook still remain fragile.”
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Schnabel and Panetta argued that such measures counter the risk of fragmentation that could hinder its monetary stimulus.
“As tensions in currency funding markets may affect national sovereign bond markets differently, market dysfunctions could present a challenge to the singleness of the Eurosystem's monetary policy,” they wrote.
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