Jörg Asmussen: Saving the euro
Speech by Mr Jörg Asmussen, Member of the Executive Board of the European Central
Bank, at The Economist's Bellwether Europe Summit, London, 25 April 2013.
* * *
Ladies and gentlemen,
First of all, let me thank the Economist for inviting me to speak on this panel on "Saving the
euro".
This is a catchy title - but, in truth, I think it is out of date. The euro is already "saved". It will
survive this crisis, it will emerge from it stronger and more countries will join the euro in the
future.
The problems we are facing today are different: how to avoid a "lost decade" of stagnating
growth and high unemployment; how to deal with unhealthy bank balance sheets; how to
answer to the understandable frustration of many citizens who do not see a "light at the end
of the tunnel".
In other words, we are not facing an acute or terminal sickness, but as the IMF recently
noted, a chronic one, that could cause us pain for years to come unless we fix it.
And fixing it is complex. We are simultaneously facing a banking crisis, a crisis of public and
private debt, a competitiveness crisis and a crisis of trust in institutions and political decision
making. There is no magic bullet that can solve it. We are in the middle of a decade of
adjustment.
can
But this of course begs the question: what we do?
And this is what I want to focus on in my remarks today: what it is realistic to expect the euro
area to achieve - and what it is not. In particular, I want to answer three questions:
First, should the ECB be doing more?
Second, how can we overcome the political challenges to adjustment?
Third, how will Economic and Monetary Union (EMU) develop from here?
Should the ECB be doing more?
Starting with the first question, "should the ECB be doing more"?
First of all, it is important to understand that the ECB has already done a lot.
We have given funding to banks at fixed rates and in unprecedented volumes. We have lent
at up to 3 year maturities. And we have widened the collateral that can be used in our
operations, allowing national central banks to differentiate, within limits, according to their
domestic conditions.
More recently, with Outright Monetary Transactions, we have taken tail risks out of the
market by creating a fully credible backstop against unfounded fears about the euro area.
All this has prevented that bank funding tensions created a general credit crunch, as well as
helped normalise financial conditions across the euro area. Target-2 balances have fallen by
almost 20%, or 200 billion euro, from their peak last year. Banks' access to funding is slowly
improving, including in some of the peripheral counties. This is reflected by the fact that
many banks decided to repay early a substantial part of the LTRO funds adding to 274 billion
Euro or half of the initial net liquidity injection.
But as you know, there are some key indicators where we are still not seeing an effect.
Availability of credit to SMEs in some parts of the euro area remains constrained. More
generally, growth remains weak and unemployment, especially for young people, is
unacceptably high.
This has led many people, especially in this country, to ask, "why doesn't the ECB do more?
Why doesn't it copy the measures of other central banks like the Fed, the Bank of England or
the Bank of Japan?"
This is of course a very complex issue - and there are three dimensions to the answer.
First, we have to respect our mandate, which is price stability. This means that there are
certain ideas - like allowing higher inflation, or targeting a rate of employment - that we
simply cannot entertain.
Second, we have to work within the financial structure we have in the euro area.
The two key facts about this financial structure are that it is bank-based, rather than capital
market-based, and that there are multiple benchmark interest rates, rather than a single rate
universally acknowledged as "risk free".
This means that large-scale asset purchase programmes targeted at capital markets would
not be very helpful in the euro area. And it means that policies like forward guidance or QE,
which aim to push down the risk-free rate, are not easily applicable here.
Moreover, a more recent feature of our financial structure is financial fragmentation. This
implies that lower interest rates have asymmetric effects, and not in the direction that we
want them.
Due to impaired monetary policy transmission, the pass-through of rate cuts to the periphery
would be limited, and this is where they are most needed. At the same time, rate cuts would
further relax already unprecedentedly easy financing conditions in the core. This is not per se
a problem - but interest rates that are too low for too long can eventually lead to distortions.
In particular:
•
to a misallocation of resources, which ultimately leads to lower potential growth,
•
to excessive capital inflows into a number of emerging economies with exchange
rate effects and credit risks,
•
and to reduced incentives for governments, banks, and corporates to adjust.
These costs of very low interest rates are real, and they rise over time. Of course, these
costs have to be weighed against the need for exceptional monetary policy measures in a
crisis.
These transmission problems bring me to the third dimension: we have to recognise the
limits to what monetary policy can achieve in current conditions.
The ECB can and has addressed bank funding problems. But there are other barriers holding
back bank lending, like heightened risk aversion, a lack of loan demand and insufficient
capital. And above all, bank lending will only fully come back when the bank balance sheet
repair is completed in all member states. The ECB cannot remove these constraints. This is
where our responsibility ends and that of governments or other EU institutions begins.
Monetary policy is not an all-purpose weapon for any kind of economic illness.
How can we overcome the political challenges to adjustment?
Some of you might react to this that governments are already being asked to do too much.
That the costs of adjustment are too high in some countries, and at some point, people will
simply not take anymore.
This links to my second question: how can we overcome the political challenges to
adjustment?
Let me be clear: every policy-maker in the euro area understands that the process of
rebalancing within the euro area is painful. We are deeply concerned by the levels of
unemployment we are seeing, in particular for young people.
In Spain, more than 5 in 10 young people currently cannot find work. In Greece, the figure is
almost 6 in 10. This is unacceptable - and it is also dangerous.
But the political challenge, I believe, comes not from the process of adjustment itself. People
can accept a period of hardship if it is necessary.
It comes from the belief that there are better alternatives available that are being denied. This
is what causes people to reject adjustment, or to blame others at home or abroad for their
predicament.
This is fine as far as it goes: we are democracies and we need a robust public debate. But it
becomes a problem when the debate does not contain all the facts. If politicians put forward
supposed alternatives, then they also need to be honest with citizens about their
consequences.
Take for instance the common claim that "austerity has failed" and that, to get back to
growth, fiscal policy has to be loosened.
This may sound attractive at first sight, but delaying fiscal consolidation is no free lunch. It
means higher debt levels. And this has real costs in the euro area where public debts are
already very high.
First, it puts countries back at the mercy of financial markets, which may or may not choose
to finance the new debt at affordable rates. We should, after all, not forget that financial
markets create our own "debt ceiling" in the euro area and several countries are pressing up
against it. This also reduces their room for fiscal stabilisation in the future, which is essential
in the euro area where we have no federal budget.
Second, it leads to an ever greater proportion of revenue going on servicing debt, rather than
investing in future growth. In Italy, for instance, around 80 billion euros a year goes on debt
service - this is more than 10% of the annual budget which is not being spent on education
or infrastructure.
Third, it simply passes the burden of consolidation to the next generation. Under the new EU
debt rule, all euro area countries are legally bound to start reducing their public debts below
60% of GDP. So the more debt rises today, the more it has to be brought down in the future.
And six euro area countries already have debt levels in excess of 90% of GDP.
In short, delaying fiscal consolidation is not an easy way out - if it were, we would have taken
it. Countries are consolidating because, given their already high debt levels, it is the best way
to secure long-term stability and inter-generational fairness.
It would help the politics of adjustment if this message got more attention.
Another claim that we sometimes hear is that countries should put off structural reforms; that
combining them with fiscal consolidation in the current economy will only make the downturn
worse.
But again I have to ask, what are the consequences?
First, it is, in a sense, only delaying the inevitable. The growth models of a number of euro
area countries, based on ever-rising public spending, or a particular booming sector, are
over. Change had to come. Several are facing an unavoidable period of "double
deleveraging" in both the public and private sectors. If they want economic growth, it has to
be through a more competitive, export-led model - and this can only happen through
structural reforms.
Second, far from being separated from fiscal consolidation, structural reforms are essential to
make fiscal consolidation work. If people see only budget cuts and tax rises, with no
measures to produce higher growth, it is no wonder they reject adjustment. We have seen
this for example in Italy. By contrast, the experience of Latvia shows that frontloaded reform
and consolidation efforts can lead to a quick bounce-back in growth and employment.
Third, those who reject structural reforms often overlook a key aspect from the debate, which
is their wider social effect, in particular on fairness. Ultimately, structural reforms benefit the
many at the expense of the few. And this is key during a crisis like this where inequality is on
the rise.
By breaking down two-tier labour markets, like in Spain, they create opportunity for excluded
young people. By opening up closed professions, like in Italy, they help reduce persistently
high inflation that erodes real incomes. By reforming tax administration, like in Greece, they
ensure the burden of consolidation is spread more fairly over different social groups.
A recent OECD Report called this the "Double Dividend" of structural reforms: they increase
growth, and if implemented properly, decrease inequality.
To sum up, overcoming the political challenges to adjustment is fundamentally about
communication. It is about pointing out the real costs of alleged alternatives; about resisting
the temptation to blame others for problems that begin at home; and about explaining the
long-term benefits of the path being taken.
Ultimately, however, this is the job of political authorities.
How will EMU develop from here?
If this is what governments can do to get through the crisis, what can the euro area as a
whole do? How will - my third question - EMU develop from here?
I think it goes without saying that anyone who is expecting the creation of the United States
of Europe anytime soon will be disappointed or - in this country maybe - relieved. But that
said, we have made, and will continue to make, big strides in building a more robust
institutional architecture for EMU.
And let me stress: this progress is not all for the future, to prevent the next crisis. It could
feed into this one, too. In particular it could help boost the three "Cs" that are key to restart
growth: credit, confidence and competitiveness.
First, the initiatives that have been taken, and that are in store, to build a Banking Union
could give an important stimulus to credit.
Having in place a credible single supervisor, which is now agreed, should encourage the
gradual reintegration of financial markets, which will improve the transmission of the ECB's
monetary policy. On top of this, an effective single resolution mechanism and a fund filled by
levies from the industry should kick start a clean-up of banks' balance sheets, preventing
"zombification" and unblocking new lending. That is why this is the key challenge for this
year.
Second, the new measures we have in place for Fiscal Union could do a lot to bolster
confidence.
By limiting the "wiggle room" for future governments, the fiscal compact should help anchor
medium-term expectations about fiscal responsibility and debt sustainability. This will be
complemented by the new "Two Pack" of legislation, which creates real intervention rights
from the centre into national affairs, for instance allowing the Commission to pre-screen
budgets before they are adopted by national parliaments.
Third, the plans in place for Economic Union could help ensure competitiveness, in particular
the new idea of reform contracts.
The enhancement of the governance framework shows that governments in the euro area
have finally understood, what had been laid down in the Maastricht Treaty already: that in a
monetary union, the economic policies of each country are "a matter of common concern" for
all.
If questions about the Slovenian banking sector remain unanswered; if worries about French
competitiveness remain unaddressed; if an ageing German society cannot better integrate
migrants into the labour market - this has an impact on all countries of the single currency
zone.
It is therefore right and legitimate, that the euro area countries establish - and accept - much
closer oversight of national decisions. Other countries may see this differently. But the euro
area has to move ahead with deeper union. Like it or not, the euro area has become the
engine of European integration, for its own sake, and that of the EU as a whole.
This process is not a threat to the idea of the European Union. The fiscal compact and the
SSM show that countries that are willing and able to fulfil the requirements are invited to join.
As David Cameron recently said in his Bloomberg speech on Europe, this kind of flexible
integration "far from unravelling the EU, will in fact bind its Members more closely".
Conclusion
Let me now conclude.
My aim has been to create realistic expectations about what we can and cannot expect the
euro area to achieve.
We in the euro area have already done a lot to stem this crisis. Budget deficits have been
significantly reduced. Rules have been strengthened. With the EFSF and the ESM,
700 billion euros have been put on the table for financial assistance.
But we also have to work within our laws and institutions. And we have to take the people
along. We cannot manage the crisis by diktat or impose leaps in integration for which people
are not ready. This means that our progress will be slow, incremental and at times messy.
As the Economist's own Charlemagne columnist noted when reviewing the outcome of 2012,
"the pessimists did not overestimate the euro's problems, so much as underestimate the
political will to do enough to stop a euro break-up."
And anyone who continues to underestimates this will turn out either very wrong, or if you are
an investor, very poor.
Thank you for your attention.