Benoît Coeuré: Interview with Thomson Reuters
Edited excerpts from an interview with Mr Benoît Coeuré, Member of the Executive Board of
the European Central Bank, and Thomson Reuters, conducted by Mr Paul Carrel, Ms Eva
Taylor, Mr Sakari Suoninen and Mr Andreas Framke on 12 February 2014.
* * *
Thomson Reuters: What is your take on the Karlsruhe decision and how it affects the
interim period?
Benoît Coeuré: "We're not commenting on court decisions. This case has been reviewed by
the court. It will now be reviewed by another court, which is the European Court of Justice.
We certainly stand ready to cooperate with the European Court of Justice and explain what
we've been doing. The OMT is a programme that the Governing Council of the ECB has
designed in a way that make it both efficient and safe legally, so we firmly believe that the
OMT is safely within the remit of the ECB in terms of being monetary policy and in terms of
not being monetary financing of governments. We have ourselves set a number of limits to
the programme to make sure we are on the safe side.
The status of the OMT is not changed. It is ready to be used but it is highly unlikely it would
have to be used at the moment.
Would you consider setting limits to the OMT?
We have to wait and listen to the European Court of Justice. Meanwhile there is not much
that we can do to enter that discussion.
It is certainly not our role to double-guess or to anticipate what either the European Court of
Justice or the German Constitutional Court would say.
Is the OMT off the table now?
As I said, it's not needed today, so that's not a discussion that is very high on the agenda.
Bond-buying to cope with the redenomination risk, the way that the OMTs have been
designed, that's not a discussion that is on the agenda.
More generally, ECB President Mario Draghi has been clear that the ECB can use all
instruments that are allowed by the Treaty, and that includes asset purchases. We've done it
already, many central banks have done it, including in the past in Europe, and it's being done
daily in other regions. So it's possible of course, provided that it is justified in view of the ECB
mandate, namely: provided that it is monetary policy and that is not monetary financing of
governments."
Within that framework, a range of instruments are possible, and that includes asset
purchases, which we've done already.
Is QE possible if we see a risk of deflation?
First, let me take one step back and say we're not seeing deflation in the euro zone. We see
low inflation, slowly increasing from the current low levels back to below but close to
2 percent. That is the base-line scenario from which we are working. The discussion is which
kind of risks we have around the scenario. Certainly we have upside risks and downside
risks and we are alert to the notion that we are close to the region where a downside shift in
our inflation path could bring us into dangerous areas, so we have to be prepared. But,
again, this is not a discussion on deflation. It is a discussion on how low can inflation be
without triggering adverse dynamics. We are not there, but we have to be alert that negative
shocks could trigger that kind of scenario and then we have to be ready to react.
The second point is what we would do. We have a range of instruments that we can use to
cope with different kinds of shocks and we have to distinguish broadly between shocks to the
liquidity situation in the euro zone that would start from the front end of the money-market
curve, and for that we have a number of instruments. Then we have other shocks that would
change our medium-term inflation path and then we have other instruments. It can be either
or a combination of instruments that we can use. The bottom line here is that it all depends
on the nature of the shocks, so it has to be driven by the data and it has to be informed by
judgment.
In that data that we will analyse, certainly ECB staff forecasts will feature prominently, but it's
really too early to comment since we don't have the numbers. But staff forecasts are not the
only input, the Governing Council will base its judgment on all economic data, soft and hard.
Will there be a certain trigger?
There is no trigger, it's all a matter of judgment. We have a very clear mandate and that's
medium-term price stability.
Are you concerned that emerging market turmoil will affect that scenario?
That's certainly part of the developments that we have to follow closely. The G20 discussions
in two weeks in Sydney will be an important milestone because then we'll know more, in
particular from our emerging-market colleagues what the situation is in their jurisdictions.
It's too early to tell whether what we are seeing in global financial markets today can lead to
disruptions that can prompt a change in either our growth scenario or our inflation scenario,
or whether this is a shift in global demand that would have to take place anyway and that can
be managed in a smooth way by the international community. It's too early to tell.
Just as an example, we haven't seen the exchange rate of the euro going up significantly
since the start of the current emerging market developments. We haven't seen that much of
a spillover effect on the euro zone so far, which is grounds for cautious optimism.
What channels of impact are you watching?
Generally, the main channel is the output channel. We have to understand whether the
current volatility on global markets will have an impact on global output generally. That's why
the G20 discussion is so important, since this has to be informed by the IMF in particular. So
far the jury is still out.
In terms of inflation, it sounds like we are teetering on the brink of the danger zone, as
ECB President Mario Draghi talked about. Is that a fair assessment?
It is a fair assessment, but what we are seeing from incoming data from the real economy in
euro zone countries is that all so far confirms that the euro zone economy, both in core and
in non-core countries, is on a recovery path. In our baseline scenario, the forces coming from
the real economy, i.e. the ongoing strengthening in aggregate demand are enough to
countervail disinflationary forces.
We will get the 2016 inflation outlook in March. Would a rate cut help if it turned out
that inflation is moving too slowly back towards the target of below but close to 2
percent?
You first have to ask yourself what are the causes for low inflation and in particular whether
downward pressures on prices come from the demand or the supply side. That is a very
important discussion from a monetary policy standpoint. Certainly aggregate demand is
weak, which explains a lot the low level of inflation. But we see positive news coming from
this side. We see aggregate demand now developing in the euro zone. But on the supply
side, we have an ongoing adjustment of relative prices in several countries, which relates to
reforms on the labour and on the product markets, in particular through compressed margins.
This also contributes to the low inflationary pressures, but on this front there is nothing
monetary policy can do and there is nothing monetary policy should do, because it is a
healthy adjustment in these economies.
It sounds like you are pretty relaxed and there is no need to do anything?
Central bankers are never supposed to be relaxed (laughs). More seriously, we are confident
that the baseline scenario is a safe one, in terms of inflation coming back to 2 percent. But as
I said there are risks around this scenario and we are certainly ready to act in case shocks to
the European economy would significantly change the scenario. It is not only about the staff
forecasts, because the Governing Council decisions are a matter of judgement. There is no
mechanic link between the staff forecasts and Governing Council decisions. It will depend a
lot on our understanding of the forces that are at play in the euro zone economy and these
are complex forces. But if the conclusion of the Governing Council discussion is that we see
a significant risk that inflation does not come back to 2 percent, even in the medium term,
then of course we will have to act and we certainly stand ready to do it.
Is there any thought being given to extending the horizon beyond two years,
publishing or looking at forecasts further out?
We decided to extend the disclosure horizon of the staff forecasts, so in March there will be a
forecast until 2016 published. That does not imply that the definition of medium term has
changed. There has never been a number attached to the definition of the medium term and
there is one good economic reason for it, which is that it all depends on the nature of the
adjustment path and on the nature of shocks that hit the economy. Shocks can be more or
less persistent and I would certainly argue personally that given the persistence of the
adjustment process over a long period of time in the euro zone, the definition of medium term
under the current environment is probably longer than what it would have been under
different kind of shocks, say an oil shock.
Would you say that money markets are in a self-regulating mode? What is your
assessment of the situation?
Money markets are today in a self-regulating mode. Market participants are learning to adapt
to an environment with a lower level of excess liquidity. They are learning their way back to
normality. They are using the instruments currently provided by the ECB, meaning the main
refinancing operations (MRO) and the SMP sterilisation operations, to regulate the level of
liquidity and prices. This is now stabilising. That said, there is an element of inherent fragility
that is related to fragmentation in the money market. There are pools of liquidity that cannot
necessarily be tapped when liquidity is needed. Liquidity is not flowing smoothly across the
euro zone, the market remains fragmented and that hampers the self-balancing process that
you should normally see in a market. This makes the euro zone money market vulnerable to
shocks either from the inside or the outside. That explains why we remain vigilant. And
certainly in case we would see the current equilibrium being unsettled, the ECB would stand
ready to act and add to liquidity. It is very easy for us to do so. We have instruments that are
ready and usable. We stand ready to do it, but I do not see the need to do it today.
Would a negative deposit rate help to address the fragmentation in money markets?
It is a very possible option. That is something we are considering very seriously. But you
should not expect too much of it. It can help to provide an additional incentive, but it is not the
answer to everything. But it is possible and something that we have been discussing and as
you know, we are technically ready to do it.
Would other options, such as suspending the sterilisation or cutting the reserve
requirements, just add to the existing liquidity pools or would they also be effective?
They can be effective to recreate a level of excess liquidity which would find its way in all the
cracks of the system, as we saw when excess liquidity was at very high levels about a year
ago. They can be effective in particular circumstances where there would be a need at some
point in time to inject liquidity into the market. But I don't see the need to do it now. And they
are very much one-off measures and cannot be a permanent answer to the issues faced by
the money market.
If deflation in the euro zone is a very alarming situation, why is deflation in the part of
euro zone not a very alarming situation a very alarming situation for that part?
Because deflation is a dynamic concept. It has to do with expectations and, it has to do with
both inflation and output. One measure of deflation is private agents in the economy
postponing their decisions to invest or consume and these are by essence macroeconomic
dynamics that can only be observed at the euro zone level, because our economies are not
closed economies. The euro zone economy is one economy. You have trade links and links
through the interest rate, the money market and capital markets. Within a monetary union
with a single market for goods, services and capital, which is our situation, you cannot have a
deflationary spiral at the level of one single country. You can have relative price adjustment,
but you cannot have a deflationary spiral. And by the way, we are not seeing consumers,
households or companies postponing their spending decisions. Quite to the contrary, what
we are seeing is aggregate demand accelerating. That's the best evidence that we don't
have deflation.
What do you think would be the most effective way to strengthen your forwards
guidance, should you need to?
The best way to support the forward guidance is to act whenever necessary in compliance
with the forward guidance. That is why we are saying we are ready to act if the situation
would need it, consistent with our forward guidance that rates will remain low or lower for an
extended period of time. The Governing Council certainly is ready and has started to confirm
its commitment to the forward guidance. What I would not favour personally is putting
numbers on the forward guidance, by putting thresholds or triggers. An unemployment
threshold in our case doesn't make sense because we don't have a single labour market in
the euro zone and we have a primary price stability mandate. And an inflation threshold is
not feasible in my view because the euro area is undergoing deep structural change that
shifts the relationships between economic variables.
So this leaves us with an interest rate cut?
If warranted.
It's not necessary to sharpen the forward guidance now?
So far the forward guidance as it has been designed by the Governing Council has served us
well in the sense that is has made it possible to some extent to disconnect European interest
rates from U.S. interest rates.
It has served us well to protect our money market from outside shocks and it remains
consistent with the monetary policy framework of the ECB, meaning that it is fully consistent
with both the economic pillar and the monetary pillar of the ECB. So, if we can find ways to
strengthen it, why not. But I would not argue for introducing thresholds. I don't think that
would work in our case.
What other ways are possible to strengthen it?
One of the stated objectives of the forward guidance is to stabilise our money market and it
has been, in my view, pretty successful so far. We have a number of instruments that are
available to stabilise the money market, for instance fixed rate full allotment. The Governing
Council has decided that fixed rate full allotment will stay until July 2015. And fixed rate full
allotment is, in my view, the most powerful instrument that we have to stabilise the money
market and it is being used by market participants, meaning that the MRO effectively acts as
a safety valve. It is being used by market participants to stabilise liquidity.
Something we could do if there is a need to extend the horizon under which this liquidity
backstop is available to market participants is just to extend the horizon of fixed rate full
allotment. That's not very spectacular but that's a way to provide security to the money
market in a way that is consistent with our forward guidance. That's just an example.
Would you now be upset if we see Eonia and other very short-term interest rates
steadily and an in orderly fashion go to the refi rate?
What matters most for me is stability in the money market rate, meaning that it is either
stable around a level known to market participants or it fluctuates in a way that is known to
market participants. And it will fluctuate, because we do have liquidity cycles in the euro
zone. We have a maintenance period, you have autonomous factors - treasuries pumping
liquidity in an out of the market etc - and these are factors well known to market participants
that explain why there is a certain amount of cyclicality in both liquidity and Eonia within the
maintenance period.
Insofar as this is stable and known to market participants, I think that's fine because this
does not create uncertainty. Another important criterion for me is that any volatility in
shortterm money market conditions does not spill over to longer maturities, where they would start
having an impact on lending rates to households and companies - variable rate mortgages,
for instance. We are not seeing this at all. We have seen movements up and down in the
front end of the money market curve but we haven't seen that being transmitted to longer
maturities, which explains also why I don't see a reason to act now. So that's about stability.
We used to be in a situation before the crisis where the Eonia was fluctuating close to the
MRO. We're probably back to a situation where we will see wider fluctuations between the
deposit facility rate and the MRO but that's also because of fragmentation that hampers the
adjustment process. But at long as this is a stable process I think it is fine.
What are your expectations as regards the recent proceeding in the European
Parliament's on the SRM?
The ECB deems the single resolution mechanism a necessary complement to the single
supervision mechanism, so it's very important that an agreement is reached in this
parliamentary session. Any remaining time should be used to improve this mechanism.
We've suggested for instance that shortening the timeframe for mutualisation of the single
resolution fund would be helpful to give a clearer perspective that a single European
backstop will come within a reasonable timeframe, helping to cancel the link between banks
and sovereigns. That does not necessarily imply that the contributions of banks would be
accelerated, because you can build up the fund within a certain timeframe and have a
different timeframe for mutualisation within the fund.
Do you expect bank lending to recover now that banks have adjusted their balance
sheets for the asset-quality review?
It would be a risky situation in my view to start single supervision without a perspective for a
single resolution mechanism. That would be a very uncomfortable situation for the ECB as a
supervisor.
We've seen a certain amount of front-loading, of accelerated deleveraging ahead of the AQR
cut-off date, meaning Dec. 31, 2013. There is a risk that we will see another wave of
deleveraging when the AQR results are known and action has to be taken. My personal plea
to supervisors and to banks would be that this will be done through raising capital rather than
by cutting loan books.
How concerned are you about the mood in Europe and the lack of trust towards
European institutions?
We see elements of a negative spiral whereby European citizens don't trust European
institutions and governance, while at the same time it is necessary to strengthen them to
provide a solution to the crisis and put the euro zone back on a sustainable growth pact.
European institutions jointly have to break that negative spiral and to create enough trust so
that European citizens will feel comfortable and then they can deliver on addressing the
sources of the crisis. We have to turn that negative spiral into a positive spiral. The best way
to do it is first to deliver on what has already been decided, in particular the economic
reforms in EU member countries. Reform really starts in countries and it starts bearing fruits,
with competitiveness being restored and growth coming back, even in the periphery. It has to
be continued to give tangible evidence to citizens that reform efforts are bearing fruit.
Europe also has to deliver on what has been decided in terms of euro zone governance and
that's where the banking union features prominently. Delivering the single resolution
mechanism, delivering the bank resolution and recovery directive, these are all elements of
trust for the citizens. The burden of proof is not on the side of citizens, it is on the side of
European institutions."