Vítor Constâncio: "We are certainly not almighty"- interview with
Börsen-Zeitung
Interview by Mr Vítor Constâncio, Vice-President of the European Central Bank, with
BörsenZeitung, conducted by Mr Mark Schrös, published on 11 September 2014.
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The ECB's Vice President talks about the power and the limits of the central bank, the risks
of very low inflation and the strong criticism in Germany
BZ: Mr Constâncio, many politicians and observers view the power and the instruments of
the ECB in its fight against low inflation and a weak recovery as almost unlimited, but others
say the ECB is already reaching its limits. Do you feel almighty or powerless?
Constâncio: This is indeed a really interesting question. But I would say it is neither one nor
the other: We are certainly not almighty, but we are also not powerless. What we do has an
effect on the economy and so it is very important.
But expectations or hopes that the ECB might change tack alone are overblown, yes?
If one is talking about the perspectives of growth it is true that monetary policy cannot do it
alone. It's mostly up to governments, especially structural reforms. But if one is talking about
inflation it is different: It is the responsibility of monetary policy to reach the inflation goal -
that is the fundamental creed of monetary theory and of central banks. We cannot shift this
responsibility to others, but if others can help, it is even better.
ECB President Mario Draghi has said that it might be difficult to reach the target of below but
close to 2% without some fiscal stimulus and structural reforms. But you would say that when
the inflation goal is at risk, the ECB has to act, regardless of what others do?
Right, this is how I see it with regards to inflation. However, Mr Draghi was also referring to
growth in his speech, and as I just said, that is different. Naturally, at the moment it would
help enormously if politicians would also deliver. If they would generate more growth this
would reduce the slack in the economy. This would help against the very dangerous situation
of low inflation.
But you have to be increasingly frustrated because the ECB always delivers but politicians
do not, don't you?
Yes, absolutely. But it is important to acknowledge that the stressed countries have done a
lot of structural reforms, and have started to grow again.
But at the moment the problem children are France or Italy, they refuse to make reforms.
Of course there are some countries in which structural reforms are urgently needed. If you
look at OECD 2013 report about the responsiveness to their recommendations for structural
reforms, the stressed countries are at the top and other euro area countries are below the
euro average: France, the Netherlands, also Germany.
Recently there has been a lot of talking about a "grand bargain", meaning a kind of deal
between fiscal, structural and monetary policy to overcome the crisis in the euro area. Draghi
has said that there is no such bargain. But would you say this is something that is needed at
the moment - like in Japan?
I think we need the three pillars. But at the same time we are much more concerned about
the independence of the central bank in Europe. So this kind of coordination would not be
appropriate. This is why we have decided what had to be decided on our part, and president
Draghi has mentioned what the others should do.
Only three months after a historical package the ECB has again loosened its monetary policy
significantly. Does that mean that there is an increasing worry about stagnation or even
deflation?
Two things happened since June: On the one hand, the decline in inflation expectations
across the whole spectrum. It would be extremely dangerous to let inflation expectations
deanchor...
... That means letting them fall significantly below the target of 2%...
... Right. Not under any circumstances we should let that happen. If that happens it would be
extremely difficult to regain control of inflation expectations. They are a main factor for future
inflation. On the other hand, the final results for the second quarter have been very
disappointing. This increases the slack in the economy with downward pressure on inflation.
What really matters are medium- to longer-term inflation expectations. Are they still
"anchored"?
They are starting to get de-anchored for horizons up to 4 years. These figures declined
significantly during the past two months. Now it is also starting to attain the inflation
expectations in five years for the following five years. Furthermore, the influence of
shortterm expectations on longer-term expectation is increasing. This is a bad signal and a big
concern for us. The risk that the longer-term expectations get de-anchored has definitely
increased enormously.
And that also means the risk of deflation in the euro area has increased?
I don't see a risk of an actual deflation in the sense of a broad-based decline in prices. But
the big problem at the moment is a prolonged period of low nominal growth, so low inflation
and low growth. This creates debt sustainability problems - both for private households and
governments. Furthermore, increasing real interest rates have negative effects on the
economic recovery.
But the new ECB projections for growth and inflation have been revised only marginally. Why
did the Governing Council nevertheless decide to take quite far-reaching decisions?
These are not the Governing Council's projections -this is very important. These are the
ECB's staff projections and in that sense they are just one element for the Governing
Council's decision. The risks to the downside for growth and inflation were seen as more
important by the Governing Council.
So it would be fair to say it was some kind of insurance policy against the downside risks?
When we deal with risk management we always have to be as preemptive as possible. This
is particularly the case if there is a risk to inflation expectations. We simply had to do more
right now.
With the recent decisions the Governing Council explicitly aims at a significant increase in
the ECB's balance sheet. This is a major shift in the ECB's policy, bringing it even closer to
other central banks.
With the recent interest rate cut we are now at the zero lower bound. So if we believe that we
need an even more expansionary monetary policy, we have to find different channels. An
increase in the balance sheet is one option. On the one hand, it influences the inflation
expectations for the future, and on the other hand, it triggers shifts in investors' decisions.
This will spill over to other asset markets and also have an impact on the exchange rate.
According to many observers the effects could be even bigger if the ECB would give a
precise figure for the two purchases programs of Asset Backed Securities (ABS) and
Covered Bonds.
I understand the argument. But from our perspective it is difficult and it would not be
appropriate to commit to a certain number. We have decided not to do so.
So even when we get more details at the beginning of October we will not get a precise
figure for the planned purchases?
At the moment we are not intending to give a concrete number.
But Draghi has signaled that - including the new TLTROs - the aim is to increase the
balance sheet by €750 billion to €1 trillion. Many observers doubt that this is possible,
especially within a short period of time.
We are convinced that the three components will have a sizeable effect on our balance sheet
- with the consequences I have described. We expect the most significant effect to come
from the TLTROs. This is also why we again cut interest rates. There had been rumors that
banks might not come to the first TLTROs because they were speculating that interest rates
could be cut later. This is now off the table.
Does that also mean the smaller the TLTROs uptake, the bigger the purchase programs will
be?
This is not necessarily the case. But again: We believe that this new facility is very attractive.
So banks are well advised not to miss this opportunity.
And if everything else fails the ECB will start buying government bonds? This option of a
broad based Quantitative Easing (QE) was already discussed in the Governing Council, but it
did not happen already this time. Does that mean there is no "comfortable majority" for this
step - like for the others which were announced last week?
There was no proposal for doing QE at this meeting. QE was discussed, but it was not on the
table for a decision. So I don't think you could draw this conclusion.
So QE, including the purchase of government bonds, would be the next logical step for the
Governing Council?
We are convinced that we are allowed to buy government bonds in the secondary market, if
it is justified by monetary policy considerations. But we also know what it means and this is
certainly something we would prefer not to be forced to do. We hope that the recent package
will be enough. But in view of our responsibility and our mandate, buying government bonds
certainly is something we cannot exclude.
But this would lead to even more dissent within the Governing Council. Last week's decision
was not unanimous - although it is always stressed that the Governing Council is unanimous
in its commitment to do what is necessary against the risks of low inflation.
This phrase does not mean that in a particular moment everybody has to agree to a concrete
package. The most significant thing about this phrase - which was decided upon
unanimously - is that no unconventional instrument is a priori excluded. But calibration and
timing can occasionally be a source of discussion.
But with the most recent decision the consensus decision-making is ultimately history now?
Since 2010, we have had some decisions which were not taken unanimously. In such difficult
times, there are different views. I would not qualify this as surprising or even negative as
such. In the future, we will also always try to reach consensus. But sometimes we have to
take decisions.
You have mentioned the impact the ECB's policy has on the euro. Your colleague Ewald
Nowotny made even more blunt comments by saying the aim was to weaken the currency. Is
the ECB also in this respect becoming more like other central banks, which implicitly use the
exchange rate as an instrument? Don't you fear counter-measures by others?
I have to contradict you: We have not taken a single decision which was aimed directly to the
exchange rate. No one can say that. Our monetary policy is targeted to domestic objectives.
We are justified to do so because of the difficult situation of low inflation we are in. Of course
everybody knows that unavoidably there are consequences for the exchange rate. The
devaluation of the euro is a collateral consequence of our policy. But what really matters is
the domestic objective. Not a goal for the exchange rate. We have not changed our policy in
that respect.
This reminds me of Japan. In 2013 Japanese leaders also said that the ultra-expansionary
monetary policy was aimed at domestic targets and not to weaken the Yen. At that time also
European policymakers and central bankers doubted and criticized that.
If you read the IMF or the G20 statements, the Japanese policy was always considered
acceptable because it was directed towards understandable domestic targets. Now the same
applies to the euro area, although in a different scale: We are not in deflation and we will not
be in deflation.
In Germany the ECB's policy is heavily criticized. This will increase with the planned asset
purchases. One concern is that the ECB takes risks on its own balance sheet which could at
the end cause some problems for taxpayers again. Isn't it a big risk that the support in
Germany for the ECB could be get lost completely?
This is of course a concern to us. We don't live in an ivory tower. But we have a mandate
and this mandate is for the 18 euro area countries as a whole. But I also think there are a lot
of misunderstandings and unjustified fears in Germany. Just to give one example: When we
started buying some government bonds for the first time in 2010, everybody was writing in
Germany about the forthcoming hyperinflation. This did not happen and there is no reason to
believe that it will happen now. And also in 2010 there had been fears about potential losses.
If anything, the Eurosystem made a very significant profit with these acquisitions.
But the feeling is that the ECB is more and more deviating from the stability-oriented
monetary policy of the Bundesbank in its former days. This feeling even increases if
Bundesbank President Jens Weidmann is opposing ECB decisions.
I find it difficult to say that the ECB is deviating from a stability-oriented policy when inflation
rates are at 0.3%. You could say so if inflation was at 3% or 4%. Our primary mandate is
price stability and we will not embark in policies that may create dangers to the upside in this
regard.
Another big fear is new bubbles in the financial system.
Our mandate is price stability regarding products and services, not the level of asset prices.
This is the mandate politicians have given to us in the Treaty. If we are talking about asset
prices we need macroprudential instruments, not the use of the interest rates. Some
instruments were given to the ECB in the SSM regulation - a limited set. I would like to have
more instruments of that nature.
For example?
In the UK, the government recently gave to the Bank of England the instrument of
loan-tovalue- and debt-to-income-ratios, especially to prevent bubbles in the housing and real
estate market. In the US, the Fed can declare non-banks systematically important and then
have the supervision over them. These are some good ideas.
In the euro area the situation of the banks is still a big concern. They are still seen as
undercapitalized. What do you think, especially after the ECB's Comprehensive Assessment
comes close to its conclusion?
First of all: Since last year banks have already frontloaded a lot of decisions in anticipation of
the Comprehensive Assessment. They have raised new capital and increased provisions. All
in all since June 2013 the 128 banks that will be under ECB supervision in the future have
strengthened their balance sheets by €197 billion. This also means that the ECB's check is
already a big success.
So the fears are unjustified?
Such concerns were in general based on the assumption that some assets in the banks'
balance sheets were wrongly valued. This is exactly where the Asset Quality Review comes
into play. We are confident that we can dispel such concerns once and for all. The behavior
of stock prices also shows that investors have started to again put money in European
banks.
A study by advisers to the European Systemic Risk Board (ESRB) recently called the
European banking system bloated and highly risky. Do you agree and is there a role to play
for the ECB as the new supervisor?
While not denying that some parts of Europe are "overbanked", I would qualify this statement
a little bit. The European banking sector looks much bigger than the US one compared to
GDP, but in the US most mortgages are not in the banks' balance sheets. That is an
important difference. The shadow banking system is also much bigger in the US. The
banking union will provide an environment in which we will see a concentration in the
banking system. But this should be left to the markets and not be achieved directly by
policies. I also believe that the importance of capital market financing will become more
important also in Europe. Banks are going to see their role shrink.
Let's get back to monetary policy. There is an intense debate about a "new normal", for
example in the sense that unconventional instruments are becoming normal and that interest
rates are going to be lower than in the past. Do you also see such a "new normal"?
I think there is a "new normal". The first element is the introduction of macroprudential
policies. The financial crisis has shown that price stability does not automatically lead to
financial stability and that financial crashes can be a risk to price stability. Therefore central
banks need new instruments. It is dangerous and not very effective to try to prevent or prick
bubbles via the interest rates. Another element is the necessity of unconventional measures.
It is a fact that the environment is such that the neutral real interest rate...
...that means the interest at which real GDP is growing at its trend rate and inflation is
stable...
... That this rate is negative at the moment and that it will be very low or even negative for
quite a while. This rate has a lot to do with the potential growth rate of an economy and this
potential growth rate is decreasing in many countries for some time now, because of
demographics but also because of other factors. On top of that, the planned savings
structurally are ahead of the investment opportunities. This is why I'm convinced that
unconventional monetary policies will be normal for some time to come.
Does that also mean that you fear a "secular stagnation", a long period without growth?
I'm not sure and I think nobody can be sure. Certainly there is a trend to a continuous
decrease of real interest rates that has been visible in the advanced economies in the past
decades. In this context, it is very important to increase potential growth. Therefore a lot of
different policies are needed. We must hope that this period will not last too long and that we
will be able to increase potential growth in our economies again.