Isabel Schnabel: Interview in Die Welt
Interview with Ms Isabel Schnabel, Member of the Executive Board of the European Central
Bank, conducted by Ms Anja Ettel and Mr Holger Zschäpitz on 10 February 2020 and published
on 11 February 2020.
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You want to clear up misunderstandings about the ECB. Would you say that you are now
on a type of peacekeeping mission to mediate between the central bank and the German
public?
No, that is not what this is about. I am not a mediator between two parties; I am now a member
of the ECB's Executive Board. But in my new role as a board member I am committed to
seeking greater public understanding and clearing up misunderstandings. For people to
constantly hear that the ECB's policy is harmful to them is misleading and it undermines their
trust. This worries me.
Which misunderstanding do you wish to clear up specifically?
The expropriation of savers is the main misconception. Even the term itself is legally incorrect. It
would imply that the ECB is taking something away from people that rightfully belongs to them.
But that is not the case.
But rather?
The real interest rate - that is, the interest rate adjusted for inflation - emerges from the
economy's growth potential in the long run. Sweeping macroeconomic trends - such as
demographic ageing and weak productivity growth - have caused a worldwide decline in real
interest rates. The ECB cannot change these fundamental developments but can only steer its
key interest rates around the trend. If it wishes to fulfil its mandate and stimulate the economy at
a time when inflation is too low, it has to lower interest rates even further. If the policy rate then
approaches zero, it becomes increasingly difficult to attain its objective with conventional tools.
We see this constellation all over the world.
You're suggesting that the ECB is a victim rather than a perpetrator in respect of
negative interest rates. Are there any robust economic studies that back this up?
There are countless studies that estimate the equilibrium interest rate, using various methods
and delivering different outcomes. But the trend is clear, it is pointing downward. I understand the
frustration about low returns on savings, but that is not the whole picture. Borrowers and property
owners have benefited, as have the government and employees. Analyses have been conducted
on what would have happened without the ECB's loose monetary policy. They found that
economic growth would have been considerably slower, inflation would have been lower and
unemployment higher. The one-sided, negative presentation of the consequences of the ECB's
policies is misleading. All in all, Germany has benefited from the ECB's monetary policy.
You are saying that savers are not being expropriated at all. But the ECB's negative
interest rate policy effectively means that we can forget about traditional forms of
investment such as savings accounts or life insurance policies. At the same time, people
are being advised to provide for their retirement. How are they supposed to do that?
If the ECB were to increase interest rates in the current environment, it would be harmful for
everyone - not least for savers. I can't give people any investment tips. But there's no doubt that,
in today's interest rate environment, it is not especially advisable to put all your funds in savings
or time deposit accounts. Politicians also have a duty to inform citizens about the alternatives to
interest rate products.
What do you think of German Finance Minister Olaf Scholz' plans to introduce a tax on
share transactions?
This measure is mainly politically motivated. From a economic point of view, I see it rather
critically. However, the plan is on such a small scale that it will not really change the financial
world.
Another major criticism is that the ECB's policy has created a situation in which weak
firms are being kept alive like zombies thanks to low interest rates. Do you feel that you
are unjustly coming under attack on this point too?
The share of unprofitable firms has actually declined over the past few years. That runs counter
to the theory of "zombification". All the same, concerns about this issue highlight the need to
aspire to sound regulation of the banking sector. Weak banks are more likely to extend loans to
weak firms. Thanks to pressure from ECB Banking Supervision, the share of non-performing
loans on banks' balance sheets has fallen sharply. That is an important step in the right direction.
You have spoken in favour of tighter regulations governing sovereign bonds held on
banks' balance sheets. The initiative appears to have foundered on Italy.
The fact that banks hold sovereign bonds is not the problem, it's rather the concentration of their
domestic sovereign bonds. Italian banks primarily hold Italian government bonds, German banks
hold German bonds. One lesson from the euro debt crisis was the importance of breaking the
link between bank risk and sovereign risk. The topic is extremely senstive politically, but it is
pivotal for the stabilty of the euro area. The same goes for the common deposit guarantee
scheme. That is why I was delighted about the initiative taken by Finance Minister Olaf Scholz,
who intends to address these topics to deepen the banking union. The political problem has to be
resolved by politicians.
But they're not resolving it, unfortunately.
Many do not seem to be fully aware of the urgency of completing the banking union. The aim
must be to design the instruments in such a way that they stabilise the euro area without creating
wrong incentives. That is the only way to succeed in completing banking union.
Do you understand this to include the option of allowing individual countries to go
bankrupt?
If we take the no bail-out clause in the European treaties seriously, it must be feasible to
restructure government debt in an emergency situation. But that should not be to the detriment of
the whole financial system. An orderly restructuring can only be a credible measure if it does not
endanger the banking system.
Wouldn't it be much more helpful to the banks for the ECB to finally do away with the
penalty interest rates? These are mainly causing trouble for financial institutions.
Banks themselves are primarily responsible for their weak profitability. Many banks were not very
cost-efficient even before the financial crisis. They need now to consider what they can do to
make themselves more efficient and remain competitive, whether that is through mergers or
other means. The recently introduced tiering system, which exempts a significant portion of
banks' deposits from the negative interest rate, is providing considerable relief for banks. And the
ECB's monetary policy has not only had negative consequences for banks' profits. Positive
economic developments mean that there have been fewer credit defaults and lower levels of
loan-loss provisions.
Instead of constantly complaining to the ECB about low interest rates, it would be better to ask
politicians to implement measures that would push up long-term growth. The ECB is the wrong
addressee of such complaints.
But wasn't it the ECB that, in the early 2000s, kept interest rates too low once before and
thus caused an artificial boom followed by a crisis in the southern part of the euro area?
I don't share that assessment. The causes of the crisis differed greatly from country to country.
But there were certainly shortcomings in terms of banking regulation and supervision, which
allowed credit to expand massively as equity fell. The ECB can't be held responsible for that,
though - it wasn't responsible for banking supervision at the time.
A few months ago, a group of renowned former central bankers, including Otmar Issing
and Jürgen Stark, published a manifesto in which they were extremely critical of the
direction monetary policy has taken. Do you feel that you were treated unfairly there
too?
Everyone is free to criticise the ECB, and we also have to take that criticism very seriously. At
the time, though, I wasn't yet at the ECB, so I don't feel directly targeted. But I thought that the
criticism was very one-sided and didn't pay enough attention to the positive aspects of monetary
policy.
It seems that the ECB always tries to refute the arguments made by its critics, but never
actually speaks to the critics themselves.
That is a misperception. We regularly invite those who are critical of the ECB to attend our
conferences, for example. And we will also make sure that we listen to academics with different
viewpoints as part of our strategy review.
If it is indeed the case that the public and the media are unfair in their criticism of the
ECB, can you explain why several seasoned German central bankers - including your
predecessor - ended up throwing in the towel at the ECB? Did they just misunderstand
everything too?
Each of the people involved had very personal reasons for stepping down, and it all happened
before I joined the ECB. What I can judge is the current situation, and I find the leadership style of
President Christine Lagarde to be very constructive. I don't have the impression that any
particular position in the Governing Council is systematically disadvantaged. There is an open
debate.
How do you see the role of the Bundesbank, particularly when it comes to
communication between the ECB and the public? Is the Bundesbank partly responsible
for the existing alienation?
I'm not so sure about this notion of alienation that the media likes to project. If you look at survey
results, the euro is incredibly popular in Germany and has higher approval ratings than elsewhere
in the euro area. Interestingly, trust in the ECB as an institution is also above the euro area
average in Germany.
The Deutsche Bundesbank plays a very important role as an intermediary between the ECB and
the German public. Amid all the criticism, there has never been any doubt about its support for
the single currency.
So who is responsible for the alienation between Germans and the ECB?
The ECB perhaps didn't communicate enough with the public in the past. But that's precisely
what we're trying to change, for example by including civil society in the ECB's strategy review.
What has been your experience so far of discussions at the ECB - is it more harmonious
or more argumentative than the Council of Economic Experts?
(Laughs) I haven't had much opportunity so far to get into arguments. But I can see that it's
certainly possible to bring dissenting views to the debate and that they will be listened to. That's
very important.
At other central banks, it is usual to hold a vote on interest rate decisions and to publish
the result. Should the ECB do the same in future?
That question will also be discussed as part of our monetary policy strategy review. One
argument against public votes is that, while national central bank governors are not
representatives of their country, they could come under increasing public pressure in the event of
such votes. That would run counter to the European idea.
Climate change is another topic to be covered by the ECB's strategy review. Should the
central bank conduct green monetary policy in future?
Climate change is one of the biggest challenges of our times. No-one can opt out of that
challenge, including the central bank. As long as it doesn't undermine the ECB's price stability
mandate, the central bank certainly has scope to address it, for example by having a more
sustainable approach in its non-monetary policy portfolios.
And do you want to limit your corporate bond purchases to instruments issued by green
firms?
That wouldn't be possible, because the market is much too small. I expect that many more green
bonds will come onto the market in future, because there is likely to be strong growth in the
sector. And so even if the ECB continues to stick to market neutrality, the proportion of green
bonds will increase.
The coronavirus in Wuhan is spreading fear across the world. What risks do you think it
poses for the economy, especially here in Europe?
There is huge uncertainty, about both the risk of contagion and the mortality rate associated with
the illness. It is often compared with SARS. When that disease broke out 17 years ago, it
triggered a sharp slowdown, but the effect passed relatively quickly, because SARS was soon
brought under control. No-one can credibly say at the moment whether this time will be worse or
not.
The ECB hasn't changed its forecasts so far, at least.
The next projections will be published in March. We will be monitoring developments very closely
until then.
Your personal situation has changed a lot since you joined the ECB. What has been the
biggest change in your daily work?
I have to say, it is a very intensive job. I've always had a very full calendar, including during my
time on the Council of Economic Experts. It was particularly stressful when the Council was
preparing its annual report. We referred to that period as the "campaign". I currently feel as if I'm
in a kind of permanent campaign.