Mario Draghi: Interview in Handelsblatt
Interview with Mr Mario Draghi, President of the European Central Bank, in Handelsblatt,
published on 2 January 2015.
* * *
Mr President, the Pope is of the opinion that, these days, Europe is looking old and
sick. Do you share his opinion?
Draghi: Europe needs to regain its self-confidence after the crisis. This cannot happen by
miracle. It hinges upon European Governments and European Institutions. It requires the
introduction of reforms and a stable financial framework. This way, European citizens will
regain confidence in their future and their opportunities. Confidence is the prerequisite for a
society in which people buy and invest. Europe can do that and I am firmly committed to that
goal. The Pope says that, also for the sake of the rest of the world, Europe should regain
youth and health, and it is in our power to make it happen.
What is causing this lack of confidence that you refer to?
Draghi: It is a legacy of the various crises that happened in 2008 and 2009 which clearly
revealed the weaknesses in the old framework.
And what did you find?
Draghi: We found that the debt levels of banks and nation-states were too high. Important
rules of a market economy - for example, the rule that risk and responsibility go hand in
hand - had been forgotten. All this contributed to shatter the confidence of many people in
Europe. This is why Europe is in need of structural reform. I have been saying this for a very,
very long time. I can only repeat it.
You keep saying it but you are not being heard. The ratio of debt to GDP has
continued to rise everywhere in the West. In Europe, the government debt to GDP ratio
has risen by almost 50% since the start of the financial crisis in autumn 2008. At the
moment, only five of the 18 euro area countries do not exceed the debt limits laid
down in the Stability and Growth Pact.
Draghi: This is partly due to the fact that, in some parts of Europe, there has been absolutely
no growth over the past few years. However, more recently, most countries have started to
grow again, though weakly, and to put their fiscal positions in order and to undertake
structural reforms. And, as a result, debt levels are falling for the first time. But, this takes
time. Moreover, progress on the important structural reforms - more flexible labour markets,
less bureaucracy, lower taxes - is clearly too slow.
Can you be more specific, Mr President? Which countries in the euro area need to do
more?
Draghi: All of them.
Including Germany?
I said all of them, some more than others. I welcome the German government's
announcement of additional public investment in infrastructure. Every country has its own
agenda. Those governments that have already implemented reforms are now reaping the
benefits. This applies first and foremost to Germany with its Agenda 2010. Germany is now
much more robust and stable than the rest of the euro area countries. Such examples are
encouraging. Once upon a time, southern Germany was farmland. Now, it is the hub of new
technologies.
What about the highly indebted countries in southern Europe?
Draghi: Spain has begun its liberalisation with great courage and is now one of the
fastestgrowing countries. In France and Italy, the willingness to implement reforms is growing.
Some have been approved e.g. the labour market reform in Italy, others have been
presented and are being discussed, which has taken time. The real challenge is to put it into
practice. I understand the impatience. Reforms have waited too long. It is now time to
implement them. That's my message.
And what about Greece specifically?
Draghi: It's now for the Greek electorate to decide about the future composition of the
parliament and the government.
Jean-Claude Juncker, President of the EU Commission, nonetheless wants to give
France, Italy and Belgium more time to reduce their much too high debt. All three are
in breach of the agreed fiscal rule of spending no more than 3% of national income on
new debt. Should another exception be made?
Draghi: It is up to the EU Commission to judge this. In March, it will give its judgement on the
behaviour of the countries in question. For the ECB, it is important that the European Stability
and Growth Pact is adhered to, because compliance with the rules that we gave ourselves is
a primary source of confidence.
In reality, your expansionary monetary policy, which is pumping trillions of euro into
the markets, is just buying the governments more time - and it seems that no one is
really using this time. Do you feel alone in your fight to save Monetary Union?
Draghi: We have a mandate. It is to keep inflation close to but below 2%. That is our legal
obligation. And we must deliver, within our mandate given by the European Treaty. But it is
quite clear that our monetary policy would be much more effective if the governments
implemented structural reforms.
The ECB acts and waits ...
Draghi: It acts and delivers. The others must also do their duty.
The question is why you see price stability at 2% inflation at all. 0% would be much
better, wouldn't it?
Draghi: The 2% target was decided by the Governing Council in 2003. It would certainly not
help confidence if targets were changed when it becomes difficult to meet them! Otherwise,
when we had 3% inflation, we could have set 3% as the target. We must be reliable. Inflation
has been low for some time now. This is partly due to falling oil prices and corrections of high
prices in some countries, but also to weak demand. Core inflation has been around 0.7% for
a year.
No major central bank has an objective of 0%. The reason is simple. If one aims at 0%, half
the time inflation will be positive and half the time it will be negative. And when inflation is
negative and interest rates have fallen to zero, one cannot lower interest rates to bring
inflation back to zero.
Do you fear deflation, i.e. declining prices and wages?
Draghi: The risk cannot be ruled out completely, but it is limited. The important thing is what
inflation rate people expect over the medium term. Since June, we have seen that these
expectations have declined. If inflation remains low for a long time, people might expect
prices to fall even further and postpone their spending. We are not there yet. But we need to
tackle this risk.
... and the result is grotesque. The central bank fights for more inflation. That's
strange for Germans, whose country has suffered two periods of hyperinflation and
fears a new currency reform. Do you understand the unease of the people of this
country?
Draghi: History shows that falling prices can be as damaging to the prosperity and stability of
our countries as high inflation. That is why our mandate is symmetric. And that is why we are
now ensuring that the risk of deflation you just asked me about does not materialise. You, as
a journalist, also have a duty to explain. Public opinion in Germany is very important for us.
Your intentions are good, the effects of your policies are simply not acceptable for
many citizens. People are worried about their savings and pensions. They did not
invest money, like Goldman Sachs, in shares, options and highly controversial bonds,
but focused with your majority - rather conservatively - on savings books, German
government bonds and life insurance policies. Because of the ECB's low interest rate
policy, they are currently experiencing a clear drop in wealth. Savings accounts and
insurance policy pay-outs are melting.
Draghi: Interest rates have been very, very low for a long time - and they will presumably
stay like that for a while longer. People see that the returns on their savings and the profits
from their life insurance policies are shrinking. We understand the concerns of savers. But
now let me ask a question: is that the only factor? My answer is no. After the crisis, Germany
became a safe haven. A lot of money therefore flowed into the country, with the result of
falling interest rates on medium and long term bonds - the interest rates of which are not set
by the ECB. This has hurt some savers but also benefitted borrowers, for example those who
bought houses.
Wait a minute - it was your institution which lowered the key interest rate step by step,
to 0.05% at the moment. Savings are no longer worth very much in this environment.
Draghi: In an environment of widespread economic weaknesses and falling inflation, our
monetary policy has to be accommodative. Is that cause or effect? We have to look at the
whole euro area. If we raised interest rates, the crisis would be worse. Stability would suffer -
and that would hurt investors and savers even more. We are keeping interest rates low to
stimulate the real economy and to achieve price stability.
In order to save the euro, you announced decisive measures in the middle of 2012 -
"whatever it takes". Does that mean that you are consciously putting German savings
at risk to save the euro?
Draghi: No. Quite the opposite. The risk for the German tax payer has gone down. Recall
that internal loans between some central banks in the ECB system, the famous Target 2
loans, were previously much higher. They have already gone down by half.
The answer is not really reassuring. Low interest rates are still low interest rates.
Draghi: In the United States, interest rates were also low and people complained about it.
When the recovery took hold, long term interest rates started to rise again. Likewise in the
euro area, interest rates will rise and normality will return.
Many German savers feel expropriated nonetheless. What is your advice? What
should they do?
Draghi: Insurers and banks, whose business it is to assess risk and reward, should give the
answer.
What does that mean? Investors should spread their risks around the world?
Draghi: I can't give any advice here. I'm a central banker, not an investment adviser.
The United States is in a better situation, with the economy growing stronger. The Fed
can afford to relax, unlike the ECB in the euro area. Why is Europe in such a worse
position?
Draghi: One reason is the lack of effective structural reforms. The ECB has created better
possibilities for banks; they can, in principle, lend more. But there are countries where a
young entrepreneur must wait nine months before getting a permit to open his business. And
even then, he must pay a license fee - and that's before he's made the first sale. So what
incentive does this entrepreneur have to borrow money from a bank? That's a true story. And
there are hundreds like it.
You're complaining about state obstacles?
Draghi: I am complaining about too much bureaucracy and too high taxes. Here in Europe,
we have some of the highest taxation in the whole world. That's a big competitive
disadvantage.
... not for Apple, Google and Starbucks, which pay only 1-2% in taxes in Europe.
Draghi: Aside from that: in the euro area citizens pay between 45% and 55% of their income
to the state. And that compares with 35% in the United States and 33% in Japan. The triad of
weakness in the reform process, bureaucracy and the tax burden hinder Europe's recovery.
If we don't solve this, our growth will remain weak.
Your diagnosis is undoubtedly correct, but does it really allow for an effective
therapy? If crisis countries were to lower taxes, wouldn't their deficits initially become
even bigger?
Draghi: My advice is therefore: don't give up on fiscal consolidation! But fiscal policy must
nevertheless be designed in a more growth-friendly way. Spending on investment must be
increased - and this means on research, education and the digital agenda. Other
expenditure, and also taxes, should be reduced.
In comparison with the United States, the political vacuum in Europe stands out. A
uniform leadership is missing, the euro area is politically fragile and fragmented, and
the only pan-European institution with force appears to be the ECB.
Draghi: The way Europe is governed must improve. The Union must become better than the
one we know today. Once it was very helpful to have established common fiscal rules ...
... which were not followed?
Draghi: Yes, unfortunately that was the case in 2003 and 2004. The agreed rules should be
observed. They are important for mutual trust, which in turn is the basis for sharing
sovereignty. The next stage is a stronger political union. We still have a long way to go.
Angela Merkel and the other political leaders may well have European convictions, but
in everyday life they have remained national decision-makers. The nation states have
rather revived in the wake of the financial and economic crisis.
Draghi: The nation states do not need to be abolished, but their policies need to be better
coordinated. Why can we not make structural reforms together, in parallel across several
countries? Why do the countries not establish common objectives and monitor debt
developments together?
Perhaps there is simply a lack of European leadership.
Draghi: The various countries and markets are closely intertwined. If a country is not
competitive, if it cannot stand on its own feet, if the labour market has become stagnant, then
it will become a burden for other countries. That is why there is no alternative to a
panEuropean perspective. Europe is more European than some politicians think.
Many believe that you are the only real player in Europe. A single word uttered by you
can move the markets. Is that not too much power in the hands of one individual?
Draghi: That is a gross overstatement and does not correspond to reality. My interpretation
of our mandate is very narrow: we need to deliver price stability.
Your interpretation is not and cannot be that narrow in reality. The objective of price
stability cannot be achieved in isolation from all of the other measures, such as
economic growth, innovation levels, unemployment and government expenditure.
Draghi: The ECB has always been very careful about what it says. We remain within our
mandate.
Jens Weidmann, the President of the Bundesbank, does not agree with that though.
Draghi: We do not disagree about our mandate.
Weidmann apparently does not consider it either legal to buy government bonds on a
grand scale, as currently planned by the ECB.
Draghi: We have had several interesting conversations, but as far as I know, he does not
say that. The purchase of government bonds is one of the tools in our toolbox, which we can
use to fulfil our mandate. But we cannot breach Article 123 of the Treaty, which forbids
monetary financing.
Your plans come very close to that.
Draghi: No that is wrong. When the ECB decided to buy government bonds a few years ago,
this was to repair the transmission mechanism of monetary policy and therefore was within
the mandate. These are the only government bonds the ECB has ever bought so far.
How close is your institution to buying the next large batch of government securities?
Draghi: The ECB's Governing Council has instructed the staff and Eurosystem committees
to prepare concrete measures.
How much money are we talking about?
Draghi: That's difficult to say. The risks of not fulfilling our mandate of price stability are in
any case higher than they were six months ago. Our mandate is symmetric. We have to
avoid too high inflation and we have to avoid too low inflation as well. Headline HICP inflation
has been on average 0.3% since July 2014, in other words for 6 months already.
Nevertheless, you wish to expand the ECB's balance sheet from €2 trillion to
€3 trillion. Is that correct?
Draghi: We are making technical preparations to alter the size, pace and composition of our
measures in early 2015, should it become necessary to further address risks of a too
prolonged period of low inflation. The Governing Council agrees unanimously on that.
The euro is becoming weaker and weaker. Did you encourage this currency
depreciation to bring down the price of European exports?
Draghi: The exchange rate is not an ECB policy target, even if the exchange rate is
important for price stability and growth. The recovery is weaker and unemployment is higher
than expected a few months ago. That has contributed to a weak exchange rate. It's a
natural outcome of diverging monetary policy paths in the US and the euro area. Markets
expect a less accommodative monetary policy in the United States. This contributes to a
stronger dollar.
Even if Germany has no interest, and can have no interest, in them at the current time,
does Europe not ultimately need eurobonds, i.e. common bonds guaranteed by all
states.
Draghi: That requires trust in your partner. Asking this now is the wrong question at the
wrong time. Such a climate of trust first needs to arise.
The ECB is providing ample money to the economy. Much of this probably flows into
the markets for shares, real estate and art. Bubbles emerge. Does this point to the
next crisis?
Draghi: We understand such concerns. But the ECB is highly alert in this regard. Though we
cannot with certainty exclude this possibility in the future, we don't see speculative bubbles at
this time. Bank credit has not increased very sharply. Before the crisis, bank credit had
expanded far too much and too quickly which contributed to creating financial bubbles in
several parts of the world. People were speculating with borrowed funds. That is not
happening now.
Nikolaus von Bomhard, CEO of the largest reinsurance group Munich Re, thinks there
is too much liquidity in the market. He finds that the situation is far more serious than
many people believe, and states "the collateral damage caused by what the central
banks in Europe are now doing is considerable".
Draghi: Our monetary policy stance is determined by our medium term assessment of price
stability. It is very accommodative and rightly so. However there may be some local
exaggerations in some regions and markets, for example in a few regions the prices for real
estate rose sharply. Their causes are local and should be addressed using the appropriate
local instruments. The answer to this should come from the new macroprudential instruments
and not from monetary policy.
Stock prices have increased considerably. In their search for yield, investors have
obviously discovered equity as a way out. The price of Allianz shares has doubled
over the past three years, without there having been any change in the management,
the strategy or the products.
Draghi: Such developments are possible at the local level, also on the property market. But I
would not see our policy as the cause. Many companies have been able to increase both
their turnover and their profit in real terms.
All in all, you cannot be satisfied with what has been attained. When a patient looks up
a doctor and finds, time and again, that all he does is increase the dose without that
having the desired effect, that will surely have an impact on the patient's confidence in
the doctor, won't it?
Draghi: It is not true that our monetary policy is not having an effect. The ECB has ensured
stable prices throughout its history. You should also look at the financial markets - before
and after the announcement of our programmes! You will see something major: trust has
returned. At the same time, we have created a banking union from scratch, including
harmonised banking supervision by the ECB. That has also strengthened confidence. But
these improvements have not yet been passed on in full to the real economy.
We are about to enter into a new year. What economic developments do you expect
for 2015?
Draghi: The moderate recovery is continuing. It is fragile and uneven. Recently, 14 of
18 countries have recorded positive growth, only two are in recession. Europe is gradually
becoming stronger. I am confident that we'll see all countries in the euro area grow this year.
And after that?
Draghi: I am prudently optimistic. We believe that the combination of an expansionary
monetary policy with government reforms will bring back much of the confidence lost.
Is it still legitimate to speak of Europe in a "crisis"? Or would you say that the crisis is
already part of history?
Draghi: The issue is rather an extended period of weakness than a crisis.
Is a "black zero", i.e. no government budget deficit, an important objective at present?
Is Germany setting the right priorities in this respect?
Draghi: I do not want to comment on that. Investment is low everywhere, also in Germany.
Public sector investment is lower than the historical average. The International Monetary
Fund believes that there is an investment-to-GDP gap of 0.7%. The ECB believes the figure
to be lower.
Thus, no warning about a policy that also builds upon a consolidation of public
finances?
Draghi: Consolidation is the basis for sustained growth. Excessive debt led Europe into a
dead-end.
You are under immense pressure. Europe is looking to you, the heads of state or
government, as well as the general public and industry. Do you like such challenges,
or do you tend rather to suffer under them?
Draghi: It is important for anybody who has responsibility to be aware of the obligations
entailed. That accompanies me through the day. That is what gives me strength.
That sounds very Prussian for an Italian.
Draghi: I believe that fulfilling one's obligations is not a national peculiarity of the Germans.
Is it one of the obligations of the President of the ECB to develop an exit strategy in
case matters turn out to be different to what we have discussed here, for instance if
the euro area were to break into two halves? It would, at any rate, be difficult for
monetary policy to lastingly bridge an economic divide if governments fail to find one
another.
Draghi: A breakup of the euro area? That will not happen. That is also why there is no
Plan B.
The political domain always needs a Plan B if things develop less well than envisaged
is the view of, for example, Henry Kissinger, US Secretary of State for many years. In
an interview he gave to Handelsblatt, he advised those with responsibly in Europe to
think of alternatives.
Draghi: Kissinger is a politician, I am not.
And that is to remain so?
Draghi: (laughs) I don't want to be a politician.
Not even as State President of Italy, your home country? President Napolitano, the
current incumbent, intends to retire shortly.
Draghi: My period of office as President of the ECB runs until 2019.
Mr Draghi, thank you for the interview.