Peter Praet: Interview in Die Zeit
Interview with Mr Peter Praet, Member of the Executive Board of the European Central Bank, in
Die Zeit, conducted by Ms Lisa Nienhaus and Mr Mark Schieritz on 12 December, and published
on 14 December 2016.
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Mr Praet, you are a member of the Executive Board of the ECB and thus part of an international
elite that is really hated by the new right-wing political movements. Do you feel threatened by
that?
Peter Praet: No, but I am worried. As a European institution, we look at how much people trust
us. People like the euro, but the latest Eurobarometer survey shows that trust in the European
institutions has strongly declined in recent years. This is true for the whole of Europe as well as
for national institutions, not only for the ECB. But for us too.
No wonder, when savers no longer get any interest!
That is not the reason. In recent years, i.e. during the period of low interest rates, the approval
ratings have not changed significantly. The strong downturn came in 2008 as a result of the
financial crisis. That is when trust plummeted. The reasons were, above all, economic. Before
2008 we, and most economists, predicted that the euro area would carry on growing
continuously. But then came the recession following the financial crisis and we never reached
the predicted economic strength. Shortly afterwards came the sovereign debt crisis, the second
recession and the rescue programmes with their cutbacks. So expectations were raised much
too high and could not be fulfilled. That is a great disappointment for many people.
So everything is the fault of the financial crisis. The ECB itself has nothing to do with it?
Central banks didn't see the crisis coming at an early stage either. In the years before the
financial crisis, credit growth was very high, not only in Europe, benefiting from relatively low
interest rates in some countries. We gave several warnings at the time about the excessive
liquidity in the markets. When the crisis then erupted, people realised that Europe was not
properly prepared for a situation like this.
What was missing?
The toolkit was insufficient to respond to critical developments. There was no common banking
supervision, there were no institutions for the stabilisation or resolution of banks, and there were
no macroprudential instruments. That increased the effects of the crisis. Central banks have just
one instrument to achieve price stability - the interest rate. It is difficult to counter a complex
situation with this instrument alone. However, we have made good progress in stabilising the
foundations of Monetary Union.
The European elites did that too. But the people are clearly not happy with that. Ultimately, it
comes down to the euro, without which there would be no problems. Was the euro itself a
mistake?
No. The crisis only illustrated that the euro had been created within an incomplete institutional
framework. However, we should not forget what we owe to the euro. Before Monetary Union
there were repeated economic shocks owing to strong fluctuations in exchange rates. That
created trade barriers. In addition, you must always consider the alternative. Take Germany, for
example: without the euro, the currency would have risen very strongly in value during the
financial crisis. For a country that exports a lot, that is a problem. I rather doubt that the country
would have been better off than it is now - and it is likely that interest rates would have been
pushed down very strongly in this case too.
At present everyone is saying that the elites have lived too long in their filter bubbles and did not
notice the rise in populism. Does that apply to you too? Do you live in the ECB bubble?
For us, diversity in opinions and views is an important basis for good decisions. On the ECB's
Governing Council, we have the 19 governors of the national central banks who are there in a
personal capacity and not as representatives of their countries. That enriches the debate and our
perspective on the world. And, conversely, they are also able to explain our decisions in their
countries. We ourselves regularly go to the European Parliament, and occasionally national
parliaments.
For example, Mario Draghi spoke at the German Bundestag a few weeks ago.
And you?
I try to exchange views with different people as often as I can. For example, I've been to events
for German small and medium-sized enterprises, and I take part in a lot of panels. Just recently I
met the President of the Bavarian building societies, among others, in this way. Both sides learn
from such events. The Germans are critical, but they are always polite, I find. Most people
understand me better after such events. But usually they still don't think that what we are doing is
good.
Do you sometimes meet tough critics? For example, members of Alternative for Germany
(AfD), a party that came into being quite specifically as a protest against the euro rescue policy?
We are open to dialogue with our critics. And we also engage in such dialogue on a regular
basis, not least in the European Parliament.
At the moment, interest rates are rising all around the world. Only the ECB is resisting the trend
and is leaving interest rates low. Are you losing touch?
The picture is not at all as uniform as you describe. In the United States, for example, the
economic recovery is far more advanced than in the euro area, unemployment is lower and the
rate of inflation is higher. That is why the US economy can cope with higher interest rates. We
have not got that far yet.
Why not? Unemployment is falling in Europe too, and there is growth - and the oil price is rising.
It is true that the recovery is firming. However, the speed is still moderate and inflation is still
some distance from a sustainable path back to the target value. That is why we have decided to
extend our government bond purchase programme until the end of next year. We have, however,
reduced the scale of the monthly purchases by €20 billion as of April.
Is that the beginning of the exit from the trillion euro programme?
No. We want to continue the level of monetary policy support that we have been administering to
the European economy so far.
So, what would have to happen for you to be prepared to exit?
It would have to be apparent that there was a sustained convergence in the rate of inflation
towards our objective of below, but close to, 2% over the medium term.
That can change quickly. In the financial markets it is expected that the US economy will receive
a boost because Donald Trump wants to reduce taxes and increase public spending. Europe
would also profit from that if we could export more.
There are signs of a looser fiscal policy in the United States in future, which is expected to lead to
higher growth rates. But that alone will not be enough. The important thing is to make the
economy more productive. Another outstanding question is protectionism, which would of course
be damaging, including for Europe. Trump is not President yet. We do not know exactly what he
is planning, and we should therefore be cautious.
So you want to continue flooding the world with money. You have already purchased bonds for
over a trillion euro. At the end of the programme planned so far, it will be €2.3 trillion.
We are not flooding anyone. People only ever talk about the billions of additional central bank
money that we are making available. But hardly anyone mentions the fact that money and credit
growth are fairly moderate. Our measures are thus aimed at stimulating this weak money and
credit growth.
How can that be explained to someone who is not a central banker?
Both central banks and banks can create money through lending to the economy. If the banks
are only doing so hesitantly, we can make financing conditions more attractive and so create
incentives for more generous lending. As long as the overall money supply is not growing very
quickly, that is not a cause for concern and does not lead to excessive inflationary pressures.
That means you are doing everything right, but no one understands?
I didn't say that, but when interest rates reach zero, monetary policy becomes very complicated
to explain. The central banks have not exhausted their options, but they have to resort to
unconventional means, such as the purchase of government bonds.
Here in Frankfurt, property prices have risen by 20% in one year. That is not very hard to
understand. Is that the next crisis in the making?
We follow developments in the financial markets very closely. In some regions we are indeed
seeing a strong rise in property prices, but it is still not a Europe-wide phenomenon. Moreover,
such a boom is only really dangerous when it is financed on credit. However, the issuance of
building loans is only growing very slowly.
In the event of a crisis, are you capable at all of responding in time? After all, countries like Italy
are so highly indebted that they might not be able to cope with higher interest rates.
I can take this worry off your shoulders. When the time for higher interest rates comes, then we
will increase interest rates. The countries would also be able to cope with that. Many of them
have used the period of lower interest rates to extend the maturities of their loans. When interest
rates rise, that will not therefore lead immediately to a significant rise in the cost of servicing the
debt. That does not mean that high debt levels are not a problem, but they do not restrict the
ECB's room for manoeuvre.
Italy is already causing us concern today. The big problem is the ailing banks. The new
Government is considering State aid. Does that make sense?
The European rules permit that. Even Germany put public money into the banks at the height of
the crisis. At that time, Italy did not. In my view, much more important than the question of where
the money comes from is that there is a clear-out in the banking sector. There are too many
banks in Italy and they are not profitable enough.