Benoît Coeuré: Interview in Libération
Interview with Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank,
in Libération, conducted by Mr Jean Quatremer on 4 December 2019, and published on 16
December 2019.
* * *
On 25 September, Sabine Lautenschläger, the German member of the Executive Board,
resigned after the public sector purchase programme (PSPP), Europe's "quantitative
easing", was reactivated on 13 September following a majority decision of the Governing
Council. Several other ECB members also voted against, and the governors of the
German, Austrian and Dutch central banks openly criticised this decision. What
happened?
In September, the euro area was facing the risk of a further slowdown and inflation was
remaining too far away from our 2% objective. The entire Governing Council agreed on this
diagnosis - the debate was not about the need to act, but about the choice of instruments. Some
of us were not convinced that relaunching asset purchases was the most suitable instrument,
because long-term interest rates had never been so low. It's normal for there to be different
points of view, but once a decision has been taken, we should accept it and move on. In fact,
that's one of the ECB's greatest qualities - that it can take decisions by simple majority, making it
more reactive than other European institutions. Not everyone has to be in agreement, although
it's better when they are as that gives the decision more weight.
A technical debate that nevertheless resulted in an open and intense confrontation...
Sabine resigned for a combination of personal reasons, and only she can comment on them.
Another relevant topic is communication. I think that once the institution has taken a decision,
whatever your personal opinion you should defend that decision. Things would be different if the
votes were public, which is something I've always supported. Each individual would have to take
responsibility for their vote and explain how it was in the interest of the euro area - the national
central bank governors sit in Frankfurt in a personal capacity and should support the collective
interest, not just their country's.
Since the start of the euro area crisis in 2010, the Bundesbank has routinely voted
against the ECB's decisions, criticised them publicly, even joined legal actions against
it...
The Governing Council was almost unanimous in its agreement that the measures taken during
the crisis were both necessary and within the ECB's mandate. I'm thinking particularly about the
decision on Outright Monetary Transactions (OMTs) that we took in September 2012 to protect
the euro area from speculation that could have forced some countries out of the single currency.
That decision was almost unanimous; the single vote against came from the President of the
Bundesbank, who thought these operations crossed the line separating monetary and fiscal
policy as it was designed to support a euro area country's bond market that was under attack
from the markets. This was not the opinion of the Governing Council, which had spent the entire
summer of 2012 ensuring that this line would not be crossed - we therefore made our
intervention conditional on the activation of a European Stability Mechanism (ESM) adjustment
programme. That is essential, because it means it is not the ECB that is reforming a country's
economy or getting a country's public finances back on their feet when it asks for help - the
country has to do this itself within the framework of an ESM programme. Then the ECB can
provide the liquidity that enables the bond market to stabilise. Moreover, the European Court of
Justice ruled in our favour.
We seem to be witnessing a real clash of ideologies between the left and right within the
ECB, as your zero-rates policy is resulting in the "euthanisation of the rentier", to
borrow a 19th century phrase, meaning it's hurting savers and pensioners, hence the
criticism from Germany and the Netherlands, but helping workers, or growth, in other
words.
It's a false dichotomy. One of my regrets is that we haven't managed to convince the German
public of the merits of our policy. On the one hand, monetary policy always and everywhere
affects the balance between saving and consumption via interest rates. If it didn't do that, it would
serve no purpose! And on the other hand, in a period where unemployment skyrockets, growth
slows or there is the threat of deflation, as was the case in 2012 and 2014, it is normal for the
ECB to be on the side of employment. I have no concerns here, it's part of our mandate: without
growth and employment, you cannot have price stability. Our policy is in the interest of the euro
area as a whole, and therefore of Germany, it's as simple as that. As soon as you have a single
market and a single currency, there's no point artificially setting the interests of different countries
against each other, because we are all in the same boat...
Your policies have also weakened the banks, who have seen their margins shrink to the
point that some of them are no longer concerned about charging for deposits.
On the one hand, interest rates are not low because of the ECB. Us lowering our "key rates" (for
example, the rate at which bank deposits held with the ECB are remunerated) to very low or even
negative levels means that there is a savings glut in the economy: the natural rate of interest has
fallen due to weak growth, the ageing population and a sort of anxiety in the global economy
leading to demand for very safe assets, like government bonds. But for monetary policy to work
and stimulate the economy, the interest rates set by the central bank have to be below this
equilibrium rate. If one wants to return to a situation in which savings generate returns and
conditions are supportive for the financial sector, criticising the central bank achieves nothing.
Action needs to be taken on the fundamentals to boost returns on capital, which would naturally
lead to interest rates increasing, and the central bank could follow.
On the other hand, it is true that the fact that the yield curve is flat, in other words that interest
rates are low across the maturity spectrum, is weighing on the financial sector. Indeed, the
difference between the long-term performance of savings and the short-term cost of funding is
currently almost zero. But what is weighing even more heavily on the profitability of European
banks is that they have a cost base that is much higher than that of banks in the United States,
Japan, the United Kingdom and Scandinavia, and that, in certain countries, they have
nonperforming loans on their balance sheet that no longer yield a return. And finally, there are too
many banks in Europe and consolidation has not started.
So, we need fewer banks in the euro area?
The banking union hasn't yet enabled consolidation within the sector. We need to see
crossborder M&A activity in the banking sector, and we also need to overcome a number of obstacles
to banking activity. But the banking union has played a useful role in stabilising a sector that is
now much more robust than it was in 2012, since the ECB has taken on the role of banking
supervisor and has strengthened capital and liquidity requirements. It is important to recognise
that one of the major achievements of the past eight years has been to reduce the influence of
the banking lobby. The banking union has put a stop to the vicious triangle that existed in each
country between big banks, the regulator - in other words, the finance ministry - and the
supervisor, which was generally the national central bank. We have created some distance
between the banking sector and the supervisor, which is a good thing for the people of Europe.
Another effect of your monetary policy has been to create the conditions for a new real
estate bubble, since there's no longer any return on savings.
There is a risk, but we're not there yet. There are local tensions, but nothing that affects the euro
area as a whole. Preventing risks has to start at the national level - if property prices are soaring
in a particular city, is the problem related to mortgage lending or is it related to land-use planning?
In the latter case, that certainly falls outside the ECB's purview. Financial institutions are
fundamentally stronger than they were in 2008, because they're better capitalised and they have
to comply with stricter rules, particularly when it comes to measuring their risks. For example,
Basel III has imposed limits on banks' use of internal models - previously, they could calculate
themselves the risks they were taking, and this made them overconfident. That said, if we remain
in this environment of low interest rates for a long time, the risk of real estate bubbles will of
course increase. I would like the ECB to develop an approach which allows a better comparison
between the benefits for the real economy of low interest rates and the risks created through the
financial sector. At the moment, it's not clear at what point the risks start to outweigh the benefits.
Isn't there also a need to strengthen the rules that banks need to observe when
granting a loan?
Macroprudential tools offer scope to tighten capital requirements for banks and the conditions
they impose on borrowers if financial stability problems appear to be emerging. Such measures
are taken at the national level - in France, for example, the High Council for Financial Stability,
which is chaired by the Finance Minister, has taken measures related to lending to large firms
and to housing loans. If the ECB thinks that a country isn't doing enough, it can take matters into
its own hands. The European Systemic Risk Board identifies risks and can make
recommendations to individual countries, but if the ECB thinks that this doesn't go far enough, it
can take charge and impose additional requirements at the European level, something that has
so far never been done. The area where no tools exist - and this is a matter of concern - is
nonbank activity. Since the financial crisis, there has been a shift towards the non-bank sector.
Banks have shrunk their balance sheets while investment funds, money market funds and asset
managers continue to grow and are effectively financing the economy. So, if an investment fund
buys a portfolio of loans from a bank, it becomes a creditor to firms and households. Yet there is
much less supervision and fewer prudential tools in this sector. This is where major work will be
needed in the coming years - we need to develop a macroprudential approach for non-bank
activity so that credit conditions can be tightened if necessary.
Since you started at the ECB in January 2012, the institution has undergone a
fundamental transformation. It used to be much like the Bundesbank, but now it acts
more like the US Federal Reserve.
The existential crises we went through, first with Spain and Italy in summer 2012 and then with
Greece in summer 2015, and the actions of one man, Mario Draghi, who was President of the
ECB until November this year, gave us the necessary maturity to make full use of the
instruments granted to us by the treaties. Does this mean that we have become like the Federal
Reserve? In a certain sense, yes, because we are equipped with a comprehensive toolbox to
support the euro area economy at all times, using tools like quantitative easing inspired by the US
model, and the capacity to intervene in the markets. But there are also significant differences.
For a start, we don't have the same mandate - the Federal Reserve has a dual mandate that
gives equal weighting to price stability and full employment, while the ECB's mandate prioritises
price stability. And our financial markets are not the same - bond markets in the United States
are very deep and liquid, which gives the Federal Reserve an almost unlimited capacity for
intervention. In Europe, there is no capital markets union - bond markets are fragmented across
19 countries, which limits the capacity of monetary policy.
Are you proud of what has been accomplished?
There are three things I take pride in. First, Mario Draghi's speech in July 2012, when he said that
the ECB, within its mandate, would do whatever it takes to preserve the euro, and the creation of
Outright Monetary Transactions, which were the concrete manifestation of that commitment and
made it possible to maintain the integrity of the euro area. Then there was the episode with
Greece, which was of course very controversial, as can be seen in the Costa Gavras film "Adults
in the room". But when the Greek government was close to bankruptcy, we ensured the
continued financing of the Greek economy and of Greek banks - which had lost access to the
markets and to their own savers following a capital flight - while respecting the political will of
euro area governments that the assistance to Greece should be conditional. Our actions
ultimately allowed Greece to remain in the euro. There were those who wanted to make the ECB
responsible for Greece leaving the euro area, but we resisted that! And the third thing I'm proud
of is the quantitative easing we launched in 2015, which averted the risk of deflation.
Any regrets?
We probably started quantitative easing (QE) a little too late, though I'm not blaming anyone. It
was a major innovation which required an immense effort of persuasion within the Governing
Council. For example, we had long discussions as to who would bear the risk of these asset
purchases and we finally decided that 80% would be borne by the national central banks on their
balance sheets and not by the ECB. The idea was to prevent QE, a massive purchase of public
securities - we now hold almost a third of total European debt, equivalent to 20% of euro area
GDP - from being a way of ushering in a fiscal union through the back door against the wishes of
Member States. We also underestimated the impact that the policy of fiscal austerity would have
on activity; this policy was enshrined in the Treaty on Stability, Coordination and Governance and
was necessary at the time in order to provide stability to the financial markets. But this would
have required a more accommodative monetary policy, as recommended by the IMF, going as
far as QE, which should have been running from 2010 rather than from 2015. Finally, we may
have sat on the fence for slightly too long with regard to climate change, even if that is not our
core task. Other central banks, such as the Bank of England, became aware of it earlier than we
did. For one, climate change needs to be integrated into financial sector supervision, taking into
account the risks it poses for certain sectors of activity and financial securities, and we need to
reflect on its consequences for monetary policy. And then there were other errors that were not
of our making: one reason for the deterioration of the crisis in the euro area was that we lagged
far behind the United States in cleaning up the financial sector. The European countries were
deluding themselves about the state of their banks and we were very late in conducting serious
stress tests and imposing recapitalisations. Certain countries, including France, even fought
rearguard actions so as to avoid bolstering their large banks' capital base. All of this has weighed
on growth. We now need to make sure we don't slip back again!
Christine Lagarde has announced that she will lead a review of the ECB's strategy.
Christine Lagarde is right. It's a good idea to step back and lead such a discussion. I hope that
the debate will not be held solely within the ECB, but that independent economists and civil
society representatives will be involved too.
If we look back on how the euro has fared since 1999, we can see that it did not produce
all the effects that people had hoped for. Trade in the euro area is declining, the capital
markets union is in limbo, countries with large capital surpluses, such as Germany or the
Netherlands, are investing them in the United States or in China, etc. In fact, the country
that is gaining the most from the euro is Germany, which amply benefits from the euro's
undervaluation.
Everyone benefits from the euro because the exchange rate risk has disappeared and financial
conditions for investment have never been so favourable. Likewise, the euro is a common good
that enables us to speak with one voice on the international scene, even if we don't make enough
use of this strength. But it is true that we created the euro, which was backed up with the banking
union and the European Stability Mechanism, to enable a single European market, and the fact is
that this market is at a standstill. Why? Because at the outset it was conceived as a space for
the free movement of goods, whereas we are now in a service economy and there is no single
market for services.
You cannot ignore the northern European countries' refusal to offer financial solidarity.
We have a political problem: the European states have a single currency which, through its very
existence, is an extraordinary expression of solidarity. But they tend to see the euro area too
much as a club with free membership, giving them the right to a certain number of services.
However, participation in the euro brings with it a duty of solidarity when your neighbour is going
through a rough patch. While it's true that the Member States fulfilled their duty towards Greece,
Ireland, Portugal, Cyprus and Spain, they did so under conditions that were extremely costly, or
even toxic, on a political level. The adjustment programmes generated huge tensions and
acrimony. And, conversely, you need to keep your own house in order to avoid creating problems
for your neighbours. Countries can have whatever economic policy they want, that's democracy,
but on the condition that they do not jeopardise their neighbours. To that end, the members of the
club need to observe certain rules. In reality, however, countries have little regard for those rules.
One day we will need to create ad hoc institutions, including an authority in charge of a euro area
budget which would embody the collective interest, have decision-making powers and be
accountable before the European Parliament. For as long as that is not in place, we will have to
cross our fingers and hope that no crisis occurs.
So is the ECB making up for the failure of political will?
Yes. The lack of coordination in the fiscal domain means that we are the ones who are doing the
work. I dream of a euro area with a strong and democratic political base, which would alleviate
the burden on the ECB. . The politicisation of the ECB results from the weakness of the political
pillar of Economic and Monetary Union. Some people accuse the ECB of doing too much and of
not being democratic enough, but the excessive expectations projected onto the ECB are only a
reflection of political weakness.