vitor constancio : interview with bloomberg tv interview with mr vitor constancio, vice - president of the european central bank, and bloomberg tv, conducted by mr paul gordon on 17 may 2018. * * * i ’ m here with vitor constancio, a man who has been at the heart of ecb policymaking basically since the birth of the euro almost two decades ago. for the last eight years he ’ s been vice - president. his term expires this month, but over that period, dating back to the all - too - brief period of calm between two recessions, he ’ s been through the unfortunate rate hikes of 2011, quantitative easing, negative interest rates and the rescue of the euro area from deflation – or the threat of deflation at the very least. today, when the governing council is almost, but not quite, ready to talk about exiting stimulus, vice - president vitor constancio is with me today. it ’ s been quite an eight years, and here we are : you ’ re about to go at a critical moment, because the economy is slowing. how worried are you? just a slight slowdown so far – which, by the way, was expected. you may recall that the staff projections that were published, after the high growth of last year, already pointed to a certain deceleration. so, what is happening is still within the bounds of the staff projections for the whole year, which nevertheless forecast growth above 2 %. the deputy governor of the finnish central bank, olli rehn, who is tipped to, is likely to join the ecb, has been nominated to do so, he says the medium - term outlook is tilted towards the downside. that ’ s not quite the same as the ecb says. i have not read what he said, but let me remind you : the projections that have been published, they foresee a growth rate for next year around 2 % and then 1. 7 % for 2020. indeed, on a path of deceleration, because for demographic reasons and other reasons, potential growth is not very high in europe – by the way, not also in other advanced economies. we have been growing above potential, especially last year, this year also. of course, as the output gap closes, we are reverting to potential growth. are you still comfortable with market expectations, which are roughly for an end to qe – to net

high wage growth would no longer be remedied by means of devaluations. instead, imbalances in the labour market would be addressed by means of a counter - cyclical policy. substantial emphasis was placed on the importance of wage formation for employment. only when wage growth dropped below the level of our trading partners did unemployment begin to fall and the manufacturing sector began to pick up. thus, the fixed exchange rate policy was not introduced in order to strengthen the internationally exposed business sector. on the contrary, it was a breach in the approach whereby monetary policy and frequent devaluations had been used to shelter these sectors. the fixed exchange rate was an intermediate target for achieving low and stable inflation. the exchange rate remained stable up to autumn 1996, partly because wage growth was low and overall demand did not generate pressures in the economy. gradually, the krone began to show wider fluctuations. the experience of the last half of the 1990s demonstrated that monetary policy cannot fine - tune the exchange rate. developments in international financial markets led to more pronounced fluctuations. and more fundamentally, when labour market pressures rose and incomes policy failed, exchange rate developments were no longer providing signals for wage formation and fiscal policy. high petroleum revenues, fiscal slippage and expectations of increased use of petroleum revenues contributed to this. the exchange rate was therefore no longer suitable as a nominal anchor. towards the end of the 1990s, increasing emphasis was placed on the fundamental preconditions for exchange rate stability. monetary policy instruments were oriented in such a way that price and cost inflation was brought down to the price stability objective of the european central bank ( ecb ). monetary policy in most countries, price stability, or low and stable inflation, is the objective of monetary policy. historical experience from norway and other countries has shown that the absence of price stability has resulted in low and unstable output and employment. history shows that there is no long - term trade - off between higher growth and higher inflation. an economic policy that fuels inflation does not generate higher economic growth. on the contrary, it paves the way for subsequent recession and unemployment. after the second world war, there was a long period of trying to achieve price stability by means of intermediate targets such as a fixed exchange rate and a target for growth in the money supply. the first explicit inflation target was introduced in new zealand in 1990. canada followed in 1991, the uk in 1992, and sweden and australia in 1993. pursuant to the regulation on monetary policy laid down by