Interview with Der Spiegel
Interview with Luis de Guindos, Vice-President of the ECB, conducted by Tim Bartz and Stefan Kaiser on 15 June and published on 22 June 2020
22 June 2020
Because of the Corona pandemic, the ECB is buying euro area government and corporate bonds for 1.35 trillion euros on the capital market. In doing so, it is depressing their interest rates and helping countries like Italy to obtain fresh money cheaply by selling new bonds. German critics, in particular, accuse you of this being state financing by the central bank. Rightly so?
Monetary financing is prohibited by the Treaty and ECB’s decisions are driven by our price stability mandate. We are experiencing a severe economic crisis. Our forecasts predict that, in the medium scenario, the euro area economy will shrink by almost nine percent in 2020 and that prices will only rise by 0.3 percent. This is significantly lower than our inflation target of just under two percent. We are therefore buying more bonds in order to promote economic growth, achieve our inflation target and prevent fragmentation in the euro area, a too strong tightening of financing conditions in euro area countries. We are acting solely according to the principles of our mandate. Against this big drop in GDP and inflation, we had to act. It is our duty to do the necessary within our mandate.
The ECB is currently discussing a new strategy. We have a suggestion for you: Call out 0.5 or 1.0 percent as the new inflation target, then you will have virtually fulfilled your mandate in no time and can stop buying bonds.
It's really not that simple. But yes, in the context of the strategy review, we will be looking at the inflation target. We will also listen to a wide range of stakeholders, academics, civil society.
Perhaps you are also measuring inflation incorrectly. Residential property has been getting more expensive for years, stock prices are rising, and many people feel that life as a whole is becoming much more expensive than the official data suggest.
Eurostat calculates inflation for the euro area on the basis of data from each country. This measurement of inflation is considered appropriate. However, it is always possible to improve it and we are looking into this, e.g. the treatment of owner-occupied housing. In our strategy review we will take great account of what you mention in your comments. Unfortunately, the pandemic postponed the work, we now aim at presenting the new strategy in mid-2021.
If asset prices for real estate and stocks continue to rise, the rich will become even richer. Those who have little or no assets will go away empty-handed. That increases social inequality.
The best policy against social inequality is to create growth and jobs. Monetary policy has greatly helped to achieve this. Please do not forget that, in the present juncture, as in 2015 and 2016, we have deflationary pressures that we have to deter.
Is it even possible to get out of crisis policy? The US central bank, the Fed, tried to do so at the end of 2018, raising interest rates and sending global capital markets into a panic.
The ECB also decided in 2018 to stop net purchases of government bonds. So you can see that we can get out if the economic conditions and inflation data allow it. At that time, we had to relaunch the programme after ten months due to economic weakness and decreasing price pressure. But if the situation improves and the inflation outlook robustly converges to a level which is in line with our mandate, we can return to exit mode.
Do you really think that's still possible? The ECB itself says that factors such as the ageing of society and globalisation are exerting long-term pressure on inflation. Then you will never again reach your inflation target of just under two percent and will continue to do so with bond purchases and give critics a cause for allegations of implicit government financing.
I see no reason why inflation shouldn't increase again. At the moment, the pandemic is depressing global demand and oil prices, and therefore consumer prices. Our forecasts are clear in that they will remain low for some time. But de-globalisation and the disruption of global value chains could also be pushing inflation up.
Are you breaking the law because you are buying many more Italian government bonds than the country's capital key at the ECB? Most recently, you bought about 20 percent Italian securities, but according to the capital key it would only be 14 percent.
No, for the pandemic emergency purchase programme, the benchmark allocation continues to be the capital key, but we use the flexibility it offers us over time, across asset classes and among jurisdictions.
What do you mean?
Above all, that in the end there will be a reckoning. We will ensure convergence to the capital key.
You would simply have to extend the program again and again, so you would never have to prove that you are following the rules, because the final settlement never comes.
I cannot foresee what will happen and therefore I cannot rule out extending the programme, but we’ve clearly said that our pandemic emergency purchase programme is temporary and under the current conditions we have stipulated that the programme will end in June 2021. Until then, we are using the flexibility we have.
How do you actually explain the boom on the stock markets? After the outbreak of the coronavirus in Europe and the USA, the markets slumped by more than 30 percent, and have since recovered their losses. How can that be?
There could be two factors at play: the measures promptly taken by the central bank and governments to cushion the economic impact of the pandemic generated some optimism. In addition, until recently, the view that the public health pandemic has been largely controlled had prevailed. All this had a positive impact on the stock markets. But we also know that markets sometimes overreact, both downwards and upwards. At the start of the pandemic we saw large drops in equity prices.
So you think that stock markets exaggerate and share prices will fall again?
I wouldn't say that. It will depend on the evolution of the pandemic. Ultimately, stock markets must remain realistic: we are facing a recession in the euro area.
What is the mood in the ECB towers? At the last meeting under former President Mario Draghi in autumn 2019, the massive crack in the central bank Council due to Draghi's monetary policy became apparent. Now the situation seems more relaxed. Is the pandemic masking the crack?
The past is the past. And I think that Mario Draghi’s successor Christine Lagarde took office with the intention of listening to everyone. Also in Draghi’s times, 99 percent of all decisions were taken unanimously.
The decisive factor is one percent disagreement. Like in autumn 2019, when the ECB suddenly started buying government bonds again. And at that time the coronavirus did not even exist.
There are always nuances. There are very knowledgeable people in the Governing Council, who sometimes vote differently. But in general, the degree of agreement is enormous.
Does that also apply to the head of the Bundesbank? The fact is that the Federal Government now handles money much more loosely and reacts more pragmatically to the crisis. Do you notice this new German flexibility also in Jens Weidmann?
The German economic stimulus package is very positive. Such programmes are the first line of defence to minimise the consequences of the pandemic. The German government's response is the right one and Germany has the financial leeway to react quickly and intensively. I believe that a fiscal response is also necessary on a pan-European level. It's not only about the size and scope of the programme, but about the message. A European response makes it very clear that there is a response from the core and the heart of the EU. And that is politically very important.
What about the Bundesbank?
I don't comment on the Bundesbank’s view. The Bundesbank has always taken a cooperative and positive attitude and made important and relevant contributions. The Bundesbank is a very, very independent institution. I can assure you of that.
As independent as the Federal Constitutional Court. That accuses the ECB of disproportionate and poorly communicated monetary policy. What next?
Our position is clear: we are a European institution and are subject to the jurisdiction of the European Court of Justice accountable to the EU Parliament as well as the European Court of Auditors. We have taken note of the judgment from Karlsruhe. Our monetary policy decisions have always been proportionate and appropriate. I expect that the Federal Government and the Bundestag will react to this. We stand ready to cooperate with the Bundesbank and to provide information to facilitate the response that the German institutions have to give to the Constitutional Court. So we are ready to cooperate, but always with full respect of our independence.
Meaning: the Bundesbank has the buck.
Well, that's your way of saying things. Once again: we are under the control of the European institutions, but we are open to cooperate with the German institutions. That is the approach.
Why is it always the Germans who cause trouble?
I don't think it's the Germans who make trouble. You know, it's the largest country in the euro area.
But they seem to have the biggest problem with the ECB's monetary policy, and above all they fear inflation more than the other Europeans.
Inflation is well below our target. In addition, Germany's growth rate has been positive over the past ten years, Germany is a very competitive economy, and the favourable euro exchange rate has also been positive. So I think that the euro has been very beneficial for the German economy and that this is recognised by most Germans.
Should Jens Weidmann send out this message more strongly because it apparently has too little resonance in Germany?
I cannot speak on his behalf. But when I listen to his remarks in the Governing Council of the ECB, I can agree very often with his comments.
Wouldn't it be better if the ECB focused its strategy much more strongly on growth rather than inflation in the future, if only to end this eternal cycle of complaints against your monetary policy?
Our mandate is enshrined in the Treaty, it has been decided by governments and parliaments, and we have no say. Whether the treaties and the mandate will be changed in the future is not known, certainly not a matter for today.
As ex-Economy Minister of Spain, you must have an opinion on such a question.
I had other priorities then. We had a difficult time, the recovery of the Spanish economy was very important. So I concentrated on other type of issues.
As Vice-President of the ECB, you are responsible for financial stability and the banks. Are you sure that the banks in the eurozone are strong enough to absorb credit defaults, which will certainly come?
European banks are, on average, in a much better capital and liquidity situation than ten years ago. The problem of European banks is that their profitability was very, very low even before the pandemic. This is clearly reflected in bank valuations in the stock markets. So profitability is the real problem. And I think that the pandemic will make this situation even worse. Since the beginning of the crisis, the valuations of European banks have fallen by 30 percent. I think that this also justifies the rapid policy responses to the pandemic.
So what must the banks do?
Cost cutting, reducing excess capacity and – for some of them - consolidating domestically and across borders. Much of what has been necessary already in the past is now completely unavoidable.
Is it true ECB has set up a taskforce to look into the idea of creating a European bad bank?
We haven’t taken any decision or entered into any detail about this. It’s premature having this discussion now.