Luis de Guindos: Interview with Market News
Interview with Mr Luis de Guindos, Vice-President of the European Central Bank, and Market
News, conducted by Mr Luke Heighton on 7 October 2019, and published on 9 October 2019.
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How pessimistic are you about the state of the European economy at the moment?
We have a sort of two-tier economy: on the one side, we have manufacturing and exports, and
on the other, we have services and domestic demand. Manufacturing and exports are clearly
underperforming the rest of the economy; that's why we have some differences among euro
area countries. Germany, for example, is much more exposed to the external sector. That's our
baseline scenario. But I think the most important point is not so much that the projection has
been revised downwards several times, but that we have not included in the baseline the
possibility of a no-deal Brexit, or even an escalation of trade tensions. If these downward risks
materialise, the growth outlook will deteriorate further, from already very low levels.
Global economic activity has been slowing for some time. The United States and China
are engaged in an ongoing trade dispute and the manufacturing sector in Europe, and
Germany in particular, has been hard hit. How much longer can the ECB - and indeed
fiscal authorities if they were to loosen the purse strings - continue to prop up the
eurozone economy under those circumstances?
The capacity of monetary policy to address these types of shocks is not unlimited. We are not
almighty; we have to be humble. Other actors have to step in. I'm referring to structural reforms,
to fiscal policy, the completion of the capital markets union and the completion of the banking
union. If we have an orderly Brexit, if trade disputes are de-escalated, that will be positive for the
European and world economy. But the message is that monetary policy cannot address all the
problems in the world. We are not the saviours of the world.
You've been portrayed as a rather reluctant supporter of the package that was
announced on 12 September. Is that fair? Were there aspects of the package that you
supported more or less than others?
I've always had a very clear approach to the way we make our decisions. This is a collegial
institution, a collegial forum. It's very simple: once a decision has been taken - and the majority
of decisions are taken with unanimity - you have to defend that decision. There are 25 of us and,
for sure, there are sometimes different views, but when a decision is taken by a clear majority, it
is important to defend it. It would be much better if we tried to reduce the level of surrounding
noise.
Would it have been difficult for President Draghi to push the package through had a
majority of the Executive Board been against it?
The basis of the package was the outlook. Inflation expectations are not de-anchoring, but there
is a potential risk that they could do so, and the threat of deflation could come to the fore. That's
why we reacted. The core element of the package was forward guidance. People have not paid
much attention to that, but in my view, that was the main, important message. And afterwards we
took other measures: cutting the interest rate, "tiering", targeted longer-term refinancing
operations, and finally the asset purchase programme (APP). But forward guidance is the main
element and the core reference for how things can evolve in the near future.
One central bank governor recently suggested life would be much easier for the ECB if
it simply accepted inflation rates at closer to 1% than 2%. Where do you stand?
Our remit is to achieve price stability, and price stability according to our present definition is
below, but close to, 2%. Whether it is symmetric or not is a different question - while it's not a
minor question, it's not the most important one either. The third element we are perhaps
overlooking is the reaction function: how powerful our instruments are in their ability to push up
inflation. I think that's the real point. We have not entered into discussion over whether the target
should be modified. It will be discussed by the Governing Council and perhaps with a new
president it will be different. But for me the kind of monetary policy decisions you take and the
tools you have to achieve the target are much more important.
It's been argued that tiering is in effect a rate increase.....
No, I don't think so. Tiering is a form of mitigation. That's why it was set.
Is it a form of mitigation that lays the ground for further rate cuts?
We haven't discussed it, but my impression is that -0.50% is the correct level at present, and as
to any further cut, we will have a good, in-depth discussion in the Governing Council. One point
that I think is particularly relevant is that although we can reduce interest rates further, the side
effects of monetary policy are becoming more and more evident and more and more tangible.
That's why we have started to say that other actors have to jump in.
Does tiering help or impede the process of banks restructuring in ways that might offset
the negative effects of negative interest rates?
This is a good question. Tiering is some relief, but the reasons for the banks' low profitability are
different. Low interest rates are having an impact, but they're not the main cause of European
banks' problems, which are much more structural. Some have argued that even tiering, by
offering relief, delays the implementation of the instruments that could improve the European
banks' profitability. That is a big problem. We are in a changing paradigm. Low interest rates are
going to be around for longer, and this has very little to do with monetary policy. Monetary policy
has to adapt to the lower level of the natural interest rate, and we are going to hit the zero lower
bound much more often than in the past. This has implications for monetary policy, but also for
the banking industry, for the insurance business, for everyone.
Following the restart of the APP, Philip Lane said recently that the question of a shortage
of bonds "may not become a problem for an extended period of time, and in any case not
for at least as long as we can project bond availability conditions with some confidence."
How long is an extended period of time?
Our calculation is that we have enough time.
But there are some who might argue that the APP was only introduced at the level it was
[€20 billion per month] because any higher and you run out of things to buy very quickly
indeed...
I don't think so. Our assessment was that €20 billion was enough in terms of the current situation
and the evolution of the ECB's balance sheet, and not just in terms of the restrictions that we
could hit.
So there is still further headroom should it be necessary. Is that the message?
Headroom is there, and €20 billion per month dovetails perfectly with the headroom we have. It
will be in place for a period of time. This is a package, and the concept of a package is that you
can't move it every two weeks. The package has to be stable, and we have to be predictable. So
if we start saying that we can modify some elements or some parameters within it, we start to
undermine its effectiveness. But, again, we are not the only game in town.
It sounds like you're ruling out any changes at the next meeting.
That will depend on the Governing Council. We will have to see what happens with the outlook.
And we will have to see what happens with the downside risks.
Is helicopter money something you would ever consider appropriate, or does it blur too
much the boundaries between fiscal and monetary policy?
We need to have an independent budgetary instrument at euro area level with a countercyclical
function and institutional governance that is different from the present set of rules. There should
be an independent fiscal authority that can determine when there is an asymmetric shock or a
problem across the euro area, and then react. And that is something that could be decided as we
decide monetary policy. It would simultaneously reduce the burden of national fiscal policy.
Does that mean that it's going to be difficult for Christine Lagarde to make any changes
to the package we have?
The president is very important, because the president sets the agenda and sometimes even the
timing of the decisions we take. And afterwards he or she has a very important role in creating
consensus, as the more consensus we have, the better for the institution, also in terms of
effectiveness of the decisions. But the president aside, the rest of the Governing Council is going
to be more or less the same, and this is a collegial institution. And the concept of a package is
something you can use perhaps once a year, but not every month, because otherwise you
undermine its effectiveness.
Is there a sense in which a new president is like pressing the reset button? Or is it more
a straightforward case of institutional continuity?
Strong institutions always have a certain kind of continuity, but the new president is the new
president, and she will have her own ideas and approaches to the organisation. But a policy
Uturn is something I would discard. And it would not be good anyway.