Peter Praet: Interview in NRC Handelsblad
Interview with Mr Peter Praet, Member of the Executive Board of the European Central Bank,
in NRC Handelsblad, conducted by Mr Mark Beunderman and published on 30 January 2016.
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The ECB began its quantitative easing programme in March 2015. What would the euro
area look like now if the ECB had not done anything then?
The decision to buy sovereign debt came on top of the support measures for banks that we
had previously put in place. These were successful. Lending began to pick up. But in 2014,
after two consecutive recessions, the recovery was losing momentum. It was a risky situation.
That's when we intervened. With quantitative easing, the financial situation in the euro area
has become more favourable: banks have resumed lending. So it's fair to say that it's working.
And that was unanimously acknowledged by the ECB's Governing Council this month. In
countries such as Spain and Italy in particular, financial conditions have improved. The
programme is clearly having a positive effect on economic growth and inflation. All of the
measures together have prevented a meltdown of the euro area.
But isn't the ECB's Governing Council divided on quantitative easing? The Dutch and
German members expressed resistance in January 2015 and again in December.
No one on the Governing Council denies that bond purchases have a positive influence on
financial conditions. And the Governing Council agrees unanimously that, in principle, bond
purchases fall within the ECB's mandate. But some members think that they may only be used
in absolute emergencies. There is also debate as to how long it will take for them to have an
impact on inflation. Moreover, some are of the opinion that bond purchases make governments
less inclined to carry out fiscal and structural reforms themselves.
That is how Klaas Knot sees it.
I am also concerned about the lack of further reforms in euro area countries, even though
much has already been done. But I strongly oppose the view that the central bank should stand
passively by if governments are not doing enough. We are acting in accordance with our
mandate. And governments would probably have done even less, while things were falling
apart. We have not only given them time to pursue reforms, but also - in a time of uncertainty
about the banking sector - to set up European banking supervision.
If there is enough pressure from the markets - if, say, sovereign bond yields are rising
- then aren't countries quicker to implement reforms?
Market discipline is indeed important. But the crisis has again shown that markets can rush
from exuberant optimism to extreme pessimism, often reacting late and abruptly too.
You say that crisis countries have benefited from the ECB's support programmes. But
what good are they to a country such as the Netherlands?
The euro area countries are strongly interdependent. The fragility of your neighbours also
affects you. People in the Netherlands, or in Germany, should not forget that. And the
Netherlands, too, would have been very severely hit if the ECB had not intervened in 2012
when the euro was under threat. But one size cannot always fit all. In some countries, financial
conditions were very poor; in other countries, monetary stimulus may not have been as
necessary. But our mandate is to contribute to the price stability of the entire euro area. That
is also in the Netherlands' national interest.
But the ECB's low interest rate policy also has a destabilising effect. The European
Insurance and Occupational Pensions Authority (EIOPA) warned last week that the
capital position of Dutch pension funds was under pressure from low interest rates.
A far more serious destabilising factor, for society as a whole, would be an economic
depression. Long-term interest rates have been declining for around 20 years. After all, the low
interest rates reflect economic fundamentals such as demographic factors and productivity and
cannot be solely attributed to the policy of the central bank which mainly needs to make sure
that inflation expectations are well anchored.
Monetary policy always has a redistributive impact, which can be adjusted by the state if need
be. A frequently-heard complaint in Germany is that savers are worse off. Those who also
have every right to complain are those who lose their job because the economy is too weak
owing to inadequate policies.
Can the ECB afford to run counter to the ideas on monetary policy in the largest country
in the euro area, Germany?
We look at the whole euro area and we are not here to represent particular countries. We are
aware of the objections in some countries. Of course you have to take them into account and
properly explain that we are acting in order to respect our mandate. That is admittedly rather
difficult.
At the meeting in January, ECB President Mario Draghi hinted at even more monetary
stimulus. Why do we need even more?
He said that the ECB will review and possibly reconsider its monetary policy stance. The
economic recovery is still vulnerable; it is cyclical and not genuinely structural. New risks have
arisen, such as the growth slowdown in emerging countries. And inflation expectations are still
markedly disappointing.
Will there already be new measures in March?
We are closely monitoring the economic data. The tone in the Governing Council's statement
is one of alertness.
The inflation rate remains well below the ECB's official target: below, but close to 2%
over the medium term. Shouldn't the inflation target be adjusted?
Definitely not! We are determined to reach our objective. Moreover, adjusting one's objective
precisely when it is more difficult to achieve would completely undermine the ECB's credibility.
The rate of 2% is a medium-term objective. It is not linked to a fixed date. It depends, among
other things, on the nature and frequency of economic shocks and how they pass through and
influence inflation expectations. If inflation expectations come under too much pressure, you
have to intervene.
Many people say: isn't low inflation a good thing? Surely it means I can buy more? Yes, if you
have a job. But many people are out of work. You also often hear that low inflation is caused
by the low oil prices. However, low oil prices for an important part stem from a decline in global
demand. So the current low rate of inflation is also a reflection of some economic weakness.