The European Central Bank said that last year’s sovereign debt crisis set back the return to normal of the continent’s money markets after the worst recession since World War II.

“The euro area money market departed again from a satisfactory degree of integration, especially for instruments with lower maturities,” the ECB said on Monday in its annual financial integration report. “For these, much of the integration gains registered in 2009 have been erased.”
The Frankfurt-based central bank embarked on a program of buying sovereign bonds in May 2010, as soaring bond yields amid unsustainable debt loads forced first Greece and then Ireland to apply for European aid. ECB President Jean-Claude Trichet has said that these and other emergency measures are “temporary” and will be removed as soon as conditions permit.
The ECB said that confidence in the banking sector has been “strongly affected” by the sovereign debt crisis, and that progress in restoring normal lending conditions present before the financial crisis began “is still relatively slow.”
“While the measured integration of the euro area money market has somewhat improved since the peak of the sovereign debt crisis in the second quarter of 2010, this progress remains fragile and the prospects are uncertain,” the report said.
The ECB said that conditions imposed by the European Commission on ailing banks in return for state aid had caused some institutions “to retrench within national borders,” hurting financial integration.
At the same time, the ECB said that the “underlying trend movement in Europe towards financial development and integration has continued in spite of the financial crisis.”
------ECB changes may spell faster tightening
The European Central Bank may step up its inflation fight as up to a third of its Governing Council is replaced this year.
An unprecedented seven seats on the ECB’s 23-member council may change hands in a year marked by the retirement of President Jean-Claude Trichet. The new generation of central bankers under the likely leadership of Italy’s Mario Draghi will reinforce the ECB’s inflation-fighting resolve, say economists at Citigroup Inc. and Societe Generale SA.
“In the short-term, the ECB may turn more hawkish,” said Klaus Baader, co-chief euro-area economist at Societe Generale in London. “Draghi will want to show he’s not lax about inflation risks and the new members will keep their voices down, strengthening the influence of established hawks like chief economist Juergen Stark.”
Germany, the only one of the four biggest euro countries yet to endorse Draghi, got a new Bundesbank president on Sunday. Jens Weidmann signaled he’ll follow in Axel Weber’s inflation- fighting footsteps on the ECB council, saying price stability must remain the bank’s primary goal. He and Luc Coene, the new Belgian central bank governor, may support further ECB rate increases to curb mounting inflation pressures.
“Weidmann won’t rank behind Weber in terms of hawkishness,” said Juergen Michels, chief euro-area economist at Citigroup in London. “It also doesn’t seem that the successors of outgoing council members will be less focused on inflation fighting.”
---------------‘Too accommodative’
ECB policy makers, who raised the benchmark rate by a quarter point to 1.25 percent last month, next convene on May 5 in Helsinki. Some economists expect them to signal that another move will come as soon as June.
Monetary policy is “still too accommodative,” Belgium’s Coene said in an interview on April 18, striking a tougher tone than his predecessor Guy Quaden, who on March 31 endorsed a “cautious” rate increase.
Draghi has also sharpened his language. While Trichet said last month’s rate step wasn’t necessarily the start of a series, Draghi signaled more to come. “Monetary policy must take into account the emergence of inflationary tensions, pushed by rising food and energy prices,” he said on April 13.
Most economists and investors predict two more quarter- point increases in the ECB’s benchmark rate this year, taking it to 1.75 percent.
----------------‘Too low’
“We believe the ECB has to raise interest rates higher than markets expect,” Andrew Bosomworth, a fund manager at Pacific Investment Management Co., wrote in a guest commentary for Germany’s Boersen-Zeitung on April 28. “The ECB’s benchmark rate is still too low in light of economic growth and inflation expectations.”
Inflation, which the ECB aims to keep just below 2 percent, accelerated to 2.8 percent last month. Incoming policy makers will have to weigh that against the risk of inflaming the sovereign debt crisis that’s afflicting peripheral nations such as Ireland, Greece and Portugal.
As the representative of Europe’s largest economy, Weidmann will be central to those deliberations. He helped steer Germany through the financial crisis as Chancellor Angela Merkel’s chief economic advisor from 2006.
Weidmann, 43, on Sunday became the youngest president in the Bundesbank’s 54-year history and the youngest ECB council member. Fluent in both English and French, he is a former student and protégé of Weber, who made a name for himself as one of the most hawkish ECB policy makers.
(Source: Bloomberg)