Benoît Coeuré: Interview with the Robert Schuman Foundation
Interview by Mr Benoît Coeuré, Member of the Executive Board of the European Central
Bank, with the Robert Schuman Foundation, conducted by Mr Jean Paul Betbèze, President
of the Scientific Committee of the Robert Schuman Foundation, 8 September 2014.
* * *
What is your analysis of the situation in the euro area?
The euro area is at a crossroads. On the one hand, it has come through the financial crisis.
On the other, it faces major challenges in terms of growth. If we consider, first, the financial
crisis, the most crucial point came mid-2012. It was passed successfully thanks to a series of
support messages sent to the countries in difficulty. Thus, after the commitment made by all
the political leaders about the future of the euro and the integrity of the euro area, came that
of the President of the European Central Bank, Mario Draghi ("Whatever it takes") and the
introduction of the OMTs (Outright Monetary Transactions), to re-establish the efficacy of
monetary policy in countries which find themselves under serious financial pressure. Of
course, this support is conditional on a country's commitments in terms of improving its
accounts and of reform, which are monitored by the European Union and the IMF. But it
allows the ECB to purchase treasury bonds from this State on the secondary market. These
two messages have led to a decline in speculation everywhere. And they were credible
because the countries were oriented towards reform.
Then there is banking union. In just two years, this organisation that brings together a
harmonised banking surveillance within the ECB (SSM: Single Surveillance Mechanism), a
harmonised bank crisis resolution system (SRM: Single Resolution Mechanism), which has a
single resolution fund, and investor bail-in rules before any call is made for public funds, have
greatly strengthened the structure of the euro area. It might even be said that the banking
union, owing to its long term effects on the functioning of the European economy, is as
important as the creation of the euro. And it was set up in two years! So, from a financial
point of view, the worst of the crisis is behind us, with extremely strong, credible
commitments on the part of the authorities, as well as these new institutions which
strengthen the solidity of monetary union.
On the other hand, however, we have to admit that growth is too weak and unemployment
far too high, notably amongst young people. This is why we have to concentrate on
stimulating long term growth in the euro area right now. It is that and that alone that will
enable the reduction of the unemployment rate for the duration, provide budgetary leeway
once more and strengthen confidence in European integration. Of course this is an economic
issue, but it is also institutional and political, given the electoral results (of the recent past).
The time has come for Europe, both from an economic and social point of view, to act and to
"produce some results" beyond the protective role played by the euro in the crisis - a role
which is underestimated - this is quite obvious. This is the only way to break the present
vicious circle whereby the lack of growth maintains the mistrust of Europe, which in turn is
preventing us from taking vital joint initiatives to strengthen growth.
Basically then, it's about "how to achieve more growth in the euro area?"
Exactly, in the knowledge that this is the issue facing all European institutions within the remit
of their mandate. Regarding the ECB our definition of price stability means an annual
increase below but close to 2% in the medium term. But inflation is low at present (0.3% in
August 2014). We have to support growth and lending to the economy, which will lead to a
rise in inflation.
But are we in deflation?
No, inflation is low, it is too weak, but we are not in a Japanese-like situation. In the case of
Japanese deflation most prices were falling. In the euro area, weak inflation comes firstly
from energy and food prices which are low, then from the effects of the crisis on consumption
and investment. It is also caused - which was to be expected - by the adjustments on-going
in some countries after years of too high inflation (notably in terms of wages), and more
recently from the strength of the euro. We should note here that when the ECB says it has no
exchange rate goal (since it has mainly an objective in terms of price increase) this obviously
does not prevent it from taking exchange rate developments into account in its analysis and
its actions. All things being equal a stronger euro justifies a more accommodating monetary
policy. At the ECB we monitor price changes of course, notably to avoid the danger of overly
weak inflation and we want to support activity by the recovery of credit.
How do we proceed?
Firstly by providing economic players with long term visibility: the ECB is expecting to
maintain short term interest rates close to zero for an extended period whilst at the same
time rates are due to rise again in the US and the UK (forward guidance). The reduction in
key rates decided on 4 September supports this visibility: at 0.05% it is clear that the
refinancing rate has reached its limit. Second, by fostering the recovery of lending to the
economy. This means improving bank balance sheets in the first instance, which the ECB is
setting in motion this year as part of the banking union and the results of which will be
published in the second half of October. This also explains the decisions taken in June to
offer Targeted Long Term Refinancing Operations (TLTRO) to support the recovery of credit.
Finally the ECB is encouraging the development of a new form of securitisation (i.e. the
refinancing of household and business loans on the loan markets), on condition however that
these new products are simple and transparent - in other words that they do not make the
same mistakes that led to the crisis. We are going to launch a conditional ECB purchasing
programme of asset-backed securities (ABS) and covered bonds. Basically we are using all
means possible to repair the banking channel to finance the economy and to develop the
capital markets, at the same time increasing significantly the liquidity provided by the central
bank to the economy.
But with these initiatives we are still within the framework of monetary policy and the ECB
cannot be asked to undertake sectoral policies, by supporting the financing of one sector or
another, which would in effect be an industrial policy outside of its remit. If the governments
want to do this they can use the instruments over which they have some control like the
Public Investment Bank (BPI France) or the European Investment Bank (EIB). For example
these institutions can guarantee securitised assets, enabling the ECB to purchase them as
part of the programme that we have announced.
Will giving credit to SMEs be enough?
Of course not. The potential GDP growth of the euro area is undoubtedly below 1% per year
at present, it could possibly rise to 1.5% over the longer term but it is clear that we have to be
more ambitious. Monetary policy can and must support short term growth but it cannot
change long term growth which depends on investment, the mobilisation of work and the
organisation of the production process. Hence, to go further and achieve more growth we
have to improve the way our economies function. These structural policies comprise a set of
reforms which involve the opening up of the goods and services markets (it is the role of
competition to eradicate in-built advantages and to direct more resources towards
investments) and helping the labour market function better to increase the employment rate.
These policies are liberal, if you like, in the way they are formulated, but they enable the
means to support growth and employment and they can and even must address in-built
advantages which imply that the creation of wealth does not benefit the greatest number. In
other words they are social in terms of the results they produce. They are especially
necessary to protect the social model which forms Europe's identity. This model has been
weakened by the crisis but we have to admit that even before the crisis it was no longer on a
viable trajectory. It had been built in the 30 years following the Second World War and with
slowing growth it was increasingly financed by credit.
Isn't there a danger of "suffering first" before we see the results of these reforms?
But there has already been too much suffering and for too long- and this has been due to a
lack of reform! 11.5% unemployment, 23.2% of youth unemployment in the euro area, even
though these figures are now dropping - it is not and will never be a choice of society.
Undertaking reforms that make it possible to provide young people with the opportunities
they deserve, to the 18 million unemployed in the euro area - that is alleviating this suffering.
Many measures of which we have just spoken have rapid effect, not forgetting that they will
be supported by entrepreneurial expectation, then by employees and households when they
see what the effects are. Moreover the exceptionally favourable conditions on the euro area
financial markets today can only be understood as the expectation of a continuation of these
reforms: if this does not happen the countries of Europe run the risk of an adjustment which
would penalise recovery. We should look around us and see that the countries which have
had to adjust - sometimes harshly given their imbalances - are now reaping the benefit of
their efforts and are taking part in the euro area's revival. I'm not just thinking of Germany
which is still benefiting from the reforms it made in the 2000s but also countries that bore the
brunt of the crisis, like Spain, which has reformed and is now witnessing growth coming back
faster than expected - even though the unemployment rate is still very high.
Can't we ask for extra time for some countries in terms of their fiscal adjustment
policies?
The stability and growth pact does in fact include some room to manoeuvre in terms of fiscal
adjustment and these margins must be used. More generally the euro area's difficult
economic situation demands that all growth levers be activated: the monetary lever, of which
the ECB is in charge, the fiscal lever for countries which have the possibility to use it, and the
structural reform lever. These three levers are complementary and the most important one is
that of reform. This was the meaning behind Mario Draghi's speech in August in Jackson
Hole. Supporting a country's supply capacity means re-creating fiscal resources and
providing fiscal room to manoeuvre in order to, for example, reduce taxes on modest
households. We cannot expect miracles of fiscal "flexibility". First, the stability and growth
pact text speaks of "major structural reform" the cost of which has to be quantifiable. Then
this cannot affect the goal of fiscal balance which is not one of Europe's inventions but which
is inevitable to prevent debt from spiralling, especially in a period of low growth. And finally
there is the issue of equal treatment. How can we explain to countries which have made the
necessary effort without any preferential treatment, and which are now starting to reap the
benefits that the countries which are starting their reform later will be treated differently? In
my opinion the best way to limit the negative effect of deleveraging on growth is to work on
the quality of budgetary adjustment (i.e. reducing unproductive spending without sacrificing
tangible and intangible investment) and to design reform in the shape of a programme as a
whole that fosters investment and employment. Incidentally this is what the French
government is doing.
There is however a limit to these plans: they are national and benefit indirectly from
the reform policies of others, therefore very little. There is not really any European
logic being implemented to support European reform projects and programmes.
You are right. Drawing up a European approach to reform is the immediate priority. Much
has been provided via the stability of the euro and will be provided as of this year by greater
stability in the banking sector. But we need greater coordination in terms of economic policy;
I think that this is the main lesson to be learned from the crisis that we have just experienced.
This means that collective surveillance has to be stronger, taken more seriously and that this
common governance covers both budgetary and structural policy. We believed that in order
to share the same currency, co-ownership rules would be enough. But we needed a
marriage contract! We might achieve this after another convergence process which would
see the countries which use the euro harmonising according to best practice in every domain
- I spoke of this in a speech I gave in Athens on 9 July last. At the end of the day we might
consider new ways of sharing sovereignty, also in fiscal matters, for example by creating a
common financial intervention capacity for the euro area countries. But prior to this we need
greater convergence and more growth, via reform and investment, as suggested by
JeanClaude Juncker. These are the necessary conditions to re-create confidence between
countries and to win back citizens' confidence in Europe.