Mario Draghi: Interview with The Wall Street Journal
Interview with Mr Mario Draghi, President of the European Central Bank, in The Wall Street
Journal, conducted by Messrs Robert Thomson, Matt Karnitschnig and Brian Blackstone on
22 February 2012, and published on 24 February 2012.
* * *
WSJ: What inning are we in with Greece until we know if we're at the resolution to end
all resolutions?
Mario Draghi: I don't know baseball. But if we didn't have that package finalized, there
would be no game. So this could be the beginning of a new world for Greece where the
pending financing problems have been addressed. Now the policies will have to be enacted.
The Greek Government has undertaken very serious commitments in the fiscal policy and in
the structural policies areas. But there are implementation risks and probably oncoming
elections. The Eurogroup gave reasonable probabilities to the success of the program if the
measures, especially the structural measures, were undertaken.
Also one could see that there is a different awareness in the Greek public opinion to the
extent that what's happening is painful but necessary. The number of people, who favour
default, inflation or even exit from the euro doesn't seem to be prevalent in Greece.
WSJ: Do you think the acute phase of the crisis has passed? It struck us this week
that once the deal was decided, we didn't see the kind of elation we've seen after past
programs.
Draghi: It's hard to say if the crisis is over. Let us look at the positive changes of the last few
months. There is greater stability in financial markets. Many governments have taken
decisions on both fiscal consolidation and structural reforms. We have a fiscal compact
where the European governments are starting to release national sovereignty for the
common intent of being together. The banking system seems less fragile than it was a year
ago. Some bond markets have reopened.
But the recovery is proceeding very slowly and remains subject of downside risks. I was
surprised too that there was no elation after the approval of the package and this probably
means that markets want to see the implementation of the policy measures.
WSJ: When you look at the risk profile of the package and the deal, is the greatest risk
arising from the streets of Greece, or is the greatest risk arising from a lack of growth
in Greece?
In the end it seems the greatest risk is lack of implementation. Some measures are
Draghi:
directly targeted to enhance competitiveness and job creation. Others foresee a radical fiscal
consolidation. The two are very complementary to ensure a return to growth after the
unavoidable contraction in economic activity.
WSJ: But some people say Greece is really suffering depression-like conditions, GDP
off 15% or 16% peak to trough. What is your view of these austerity policies in the
larger strategy right now, forcing austerity at all costs in order to bring the budget
deficits down?
Draghi: This is actually a general question about Europe. Is there an alternative to fiscal
consolidation? In our institutional set up the levels of debt-to-GDP ratios were excessive.
There was no alternative to fiscal consolidation, and we should not deny that this is
contractionary in the short term. In the future there will be the so-called confidence channel,
which will reactivate growth; but it's not something that happens immediately, and that's why
structural reforms are so important, because the short-term contraction will be succeeded by
long-term sustainable growth only if these reforms are in place.
WSJ: Austerity means different things, what's good and what's bad austerity?
Draghi: In the European context tax rates are high and government expenditure is focused
on current expenditure. A "good" consolidation is one where taxes are lower and the lower
government expenditure is on infrastructures and other investments.
WSJ: Bad austerity?
Draghi: The bad consolidation is actually the easier one to get, because one could produce
good numbers by raising taxes and cutting capital expenditure, which is much easier to do
than cutting current expenditure. That's the easy way in a sense, but it's not a good way. It
depresses potential growth.
WSJ: Which do you think are the most important structural reforms?
Draghi: In Europe first is the product and services markets reform. And the second is the
labour market reform which takes different shapes in different countries. In some of them one
has to make labour markets more flexible and also fairer than they are today. In these
countries there is a dual labour market: highly flexible for the young part of the population
where labour contracts are three-month, six-month contracts that may be renewed for years.
The same labour market is highly inflexible for the protected part of the population where
salaries follow seniority rather than productivity. In a sense labour markets at the present
time are unfair in such a setting because they put all the weight of flexibility on the young part
of the population.
WSJ: Do you think Europe will become less of the social model that has defined it?
Draghi: The European social model has already gone when we see the youth
unemployment rates prevailing in some countries. These reforms are necessary to increase
employment, especially youth employment, and therefore expenditure and consumption.
WSJ: Job for life...
Draghi: You know there was a time when (economist) Rudi Dornbusch used to say that the
Europeans are so rich they can afford to pay everybody for not working. That's gone.
WSJ: With Greece there was a lot of focus on achieving numeric targets. Now if you
take countries like Portugal or Spain, if they get these big structural economic reforms
right, should they have to be so focused on meeting specific deficit targets?
Draghi: There is no feasible trade-off between the two. Fiscal consolidation is unavoidable in
the present set up, and it buys time needed for the structural reforms. Backtracking on fiscal
targets would elicit an immediate reaction by the market. Sovereign spreads and the cost of
credit would go up. We've experienced all this.
WSJ: Do you think Portugal will need another bailout?
No. We consider the program on track.
Draghi:
WSJ: Where do you see the interbank market now? Is it healing? Is it still
dysfunctional?
Draghi: What we saw is that after the first (Longer Term Refinancing Operation) the senior
unsecured bond market reopened. In the last two months we had something like
EUR 40 billion of new issuance, which is as about as much as it was in the previous six
months or more. We also saw EUR 30 billion in new covered bond issuance. But for the
interbank markets to function we need a return of full confidence in the counterparty. We can
address only the liquidity side of the problem. But then growth prospects have to pick up.
After a very weak fourth quarter, economic activity in the euro area is progressively
stabilizing at low levels.
WSJ: It still seems as though credit has dried up in Spain, Italy and elsewhere.
Draghi: Our last bank lending survey was done in between the time the first LTRO was
decided and when it was executed, so it gives only a partial picture of what is happening.
That picture was not positive. Credit was tightening all over the euro area in different degrees
of intensity, more dramatically in the southern regions. We have to ask ourselves why this is
so. The LTRO allotment (in December) was EUR 490 billion. The return of shorter-term
liquidity from the banking system before the LTRO was about EUR 280 billion, so that the net
injection was only EUR 210 billion. And the bank bonds coming due in the first quarter were
also about EUR 210 billion. Therefore, it is likely that banks simply repurchased their own
bonds coming due. We have avoided an even worse credit crunch.
WSJ: Would you be open to doing more, or longer, LTROs if needed?
Draghi: You know how we answer these questions. We never pre-commit.
WSJ: The ECB protected its Greek bond holdings from losses by swapping the bonds
for new ones. Critics say the ECB should suffer the fate that private sector
bondholders have suffered. What's your response to that?
Draghi: The Securities Market Program bought these bonds because the monetary policy
transmission channels were broken. The purchase of these bonds was done for public
interest reasons. Also people tend to forget that this money the ECB has spent is not private
money. It is public money, it is taxpayers' money and the ECB is committed to protect the
taxpayers' money.
WSJ: Will that lessen the impact of future purchases, or are you willing to wind down
the SMP?
Draghi: The SMP holdings are small if compared to the size of the European bond markets,
and the interventions have become smaller and smaller in recent times.
WSJ: Can you rule out future debt restructurings? Some analysts would say that a
country like Portugal would benefit from this.
Draghi: We have confidence that the program countries are taking appropriate actions and
that the targets of their programs are achievable and realistic.
WSJ: There's been a lot of discussion on whether the Chinese will get involved,
whether China will buy bonds. What do you see on Chinese institutional involvement
in European financial markets?
So far I don't see any official public involvement in European financial markets.
Draghi:
There have been lots of talks and conversations. I hear about them but I haven't seen any
official investment in European financial markets.
WSJ: Over the past year two top German officials at the ECB resigned. The current
Bundesbank president opposed the bond swap and has spoken about risks
associated with the three-year LTROs. Is there a risk Germany becomes isolated
within the ECB?
Draghi: The vote for the three-year LTROs was unanimous. Given the peculiar nature of the
ECB, one of my objectives is that we have as much consensus as possible. We have to do
the right things, and we have to do them together.
WSJ: Looking at the debt crisis from the outside, people see all these crisis meetings
and even though Europe has a lot of wealth it doesn't seem to be able to channel the
money and has gone to the IMF three times. What do you say to people outside
Europe? Europe seems to be a major risk and doesn't appear to be resolving its
problems on its own.
Draghi: I wouldn't take such a negative view. Many things have happened in Europe in the
last year and a half. You have different countries that have different initial conditions - high
debt, low growth countries and countries with low debt and high growth - and they pose the
fundamental question of how do we go on without being a fiscal union. We can't have a
system where you spend as you want, and then you ask to issue (debt) together. You can't
have a system where you spend and I pay for that. Before we move to a fiscal union we have
to have in place a system where countries can show that they can stand on their own. And
this is the prerequisite for countries to trust each other. This so-called fiscal compact treaty is
actually a major political achievement because it's the first step towards a fiscal union. It's a
treaty whereby countries release national sovereignty in order to accept common fiscal rules
that are especially binding, and accept monitoring and accept to have these rules in their
primary legislation so they are not easy to change. So that's the beginning.
WSJ: You've been in the position now for four months. Is there anything that has
surprised you? Do you regret taking the job yet?
Draghi: Would I tell you that if it was true? No, I don't regret taking this job. I've been a
member of the Governing Council for six years, so certainly the new part of this job is the
inner machinery of the ECB. But the monetary policy decisions and the related decisions
were part of my knowledge even before, because we shared decisions that were taken in the
past.
WSJ: Your first months saw a lot of activity. Is there much more the ECB can do when
it comes to financial stability and economic growth? Has it done about as much as it
can?
Draghi: What I am going to say doesn't imply anything as far as future monetary policy
decisions are concerned. Within its primary mandate the ECB will do its utmost to ensure
price stability in the medium term and within the remit of the Treaty to foster financial stability.
WSJ: What's the first statistic you look at in the morning?
Draghi: Stock markets.
WSJ: Do you look at the euro exchange rate?
Draghi: Not in the early morning.