Erkki Liikanen: Interview in Süddeutsche Zeitung
Interview (edited script) with Mr Erkki Liikanen, Governor of the Bank of Finland, in
Süddeutsche Zeitung, conducted by Mr Markus Zydra and published on 7 February 2015.
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Süddeutsche Zeitung:
Mr Liikanen, why did the ECB Council decide to cut Greek banks off from ECB credit?
Liikanen: Greek banks have a counterparty status with the Eurosystem. In January, we
communicated that the collateral waiver based on which the Greek government bonds qualify
as eligible collateral to Eurosystem refinancing assumes a successful conclusion of a
programme review. This could no longer be assumed. So this was a very logical decision, as
we have to follow our rules.
But the ECB kept Greece in the emergency liquidity programme via the Bank of
Greece?
Liikanen: Every case will be treated according to ELA rules and procedures. Every bank that
receives ELA must be solvent.
The ECB wants to help the euro zone to recover economically. That is why the ECB
decided to buy government bonds for 1,1 trillion euro? Many Germans resent the
decision. What do you tell them?
Liikanen: This was a decision to deliver on our mandate which is price stability. When
inflation and as well as inflation expectations drop clearly below our definition for price
stability, and the ECB runs out of traditional monetary policy measures like lowering interest
rates, then non-standard measures, such as large scale asset purchases, are needed to
maintain our policy target. By the way, the arguments in favor of the decision were also
shared by most economists at home.
And you have to do it rather sooner than later because if you get in a deflation spiral, it
becomes very difficult to get out. Of course I understand the German discussion. By the way
in Finland for example, there is also criticism that we acted too late.
The decision was disputed - not only by the German members. How has this dispute
changed the working atmosphere in the Council?
Liikanen: There were different opinions among the members of the Governing Council about
the timing. It is a non-standard monetary policy measure, we all agree. The working
atmosphere is and has been professional and full of substance. You can justify both, doing it
now or buying bonds later, but based among the best information we had, I came to the
conclusion that risks for price stability were so high that we needed to act.
Have Jens Weidmann and Sabine Lautenschläger been all too relentless in their
criticism?
Liikanen: No, it's been professional. Nobody can claim for not having been heard in the
Governing Council. History will tell whether our timing was right. I hope the economy in the
euro area will turn for the better.
The Germans admire the Bundesbank. The blueprint in the creation of the ECB was
meant to be the Bundesbank - now there seems to be not much left of it.
Liikanen: I admire the Bundesbank too. We all learned the value of monetary policy
independence by studying the history of the Bundesbank. That is what the ECB fights for.
The spirit is there. When inflation rates were too high, I have been one of the first to support
higher interest rates. But if interest rates are close to zero, and we have protracted low
inflation and deflationary risks, that requires early action. You have to act while you can.
The Bundesbank thinks the ECB is going too far.
Liikanen: There is a new question for central bankers: If our inflation is too low should you
react with the same vigor as when it is too high?
Should you?
Liikanen: I am a hawk in both directions, fighting inflation and preventing deflation. There are
people who say zero inflation is fine. I think zero inflation makes the economy vulnerable
without any buffers. The ECB objective of below but close to 2 percent in the medium term is
safer. We haven't had this kind of a problem before, in the postwar period. Rather, inflation
was the problem, and the Bundesbank has a great record there.
Now we talk about the prospect of too low inflation for too long. We have to go far back in
history to the 1930's to understand the dangers of deflation. You would not believe how often
the history books are being quoted among central bankers in various discussions.
But buying government bonds always has the odor of financing government deficits?
Don't you agree?
Liikanen: No, not when we are doing it the way we decided to do it. We only buy bonds on
the secondary market, we buy according to the capital keys of the Eurosystem members, we
buy maximum 25 percent of each issuance and maximum 33 percent of each issuer's debt.
And it is done for monetary policy purposes. If you take all this into account you will see there
is not that problem to this respect.
The programme bolsters the creation of a bubble. Investors are forced to buy stocks,
since bonds become all to expensive due to the ECB.
Liikanen: That's a fair point. We must monitor the side effects including in the real estate
market. In member countries macroprudential tools are in place to combat these risks.
Will the 1,1 trillion programme do the job and bring back growth and inflation?
Liikanen: The programme is scheduled until September 2016. Then we look at the situation.
If inflation has not reached the target of close to 2 percent, we will continue our efforts to
reach our target.
What do think about the growing power of central banks who seem to rule the world
economy?
Liikanen: I think we would be happy to do less in the future, but it was important that we
acted in the crisis, we ensured sufficient liquidity in the market and we cut interest rates. That
was the lesson learned from the depression of the 1930ties.
The German saver wants higher interest rates.
Liikanen: Well, that is going to take some time. All savers will also benefit from the recovery
in the euro area. Stability of the economy is good for all. We have seen how the situation for
example in Spain, Ireland and Portugal has improved, we have better budget rules, we have
a Single Supervisory mechanism in Europe - all that is good for all in Europe, Germany as
well.
When will the ECB exit and drop their emergency measures?
Liikanen: I am a marathon runner. We must keep cool and moving and finish the job. When
the time comes, we decide about the exit on the basis of the analysis based on our strategy.