Wrong to ignore the risks Interview with the Handelsblatt
21.09.2018 | Jens Weidmann
Interview with Jens Weidmann conducted by Sven Afhüppe, Jan Mallien and Frank Wiebe.
Translation: Deutsche Bundesbank
Mr Weidmann, the matter of who will succeed ECB President Mario Draghi has attracted a great deal of speculation. How open would you say is the question of who will take over the presidency of the European Central Bank?
The decision forms part of a broad range of personnel matters at the European level and will probably be made in the middle of next year, after the European Parliament elections.
Do you think you’re up to the job?
I believe that all the European central bank governors ought to aspire to being a driving force in matters of monetary policy.
There are some economists who reckon that the question of Mr Draghi’s successor isn’t all that important because the path for central bank policy has already been laid out for the next few years.
You’re right to say that monetary policy is facing a period of normalisation. But it’s a long path fraught with stiff challenges, and the final destination still hasn’t been pinpointed. Incidentally, the crisis has demonstrated the crucial role which the ECB is able to play. I’m convinced that the next ECB presidency will also be an important and defining era.
There is a broad consensus that the first policy rate hike can be expected in about a year’s time. How great is the risk of this move being delayed still further?
The ECB Governing Council passes decisions on the basis of the current data and primarily in consideration of the projected medium-term path of inflation. It stressed just recently that uncertainty around the inflation outlook is receding. In my view, the risks associated with the ultra-loose monetary policy are another matter it would be wrong to ignore.
The multi-year upswing in the global economy might soon be over. What risks do you see to the economy performing well?
The problems which the emerging market economies have been experiencing recently are one source of risk. Just think of the turmoil in Argentina and Turkey. That said, the rate of expansion might turn out to be stronger than projected if fiscal policy in some countries provides greater stimulus for the economy, for instance. All in all, the current projections are indicating that the upswing in the global economy is robust. Especially so for major industrial countries.
Was the Turkish central bank right to increase its policy rates?
I make a point of not commenting on the monetary policy decisions of other central banks. But the Turkey story does show how important it is for monetary policymakers to be independent. You see, the political pressure which was clearly applied to the country’s central bank only made the currency turbulence worse.
What other risks do you see?
The trade disputes which the United States is embroiled in with China and Europe could well intensify further and drag on global growth. And the impact of an escalating trade dispute, and what this means for our monetary policy, is unclear. That’s because higher tariffs, when viewed in isolation, first of all drive up consumer prices. And trade flows can be diverted from countries hit by tariffs to others.
Have you ever put a figure on the impact of a spiralling trade dispute?
Yes, and the key takeaway is that, at the end of the day, it would take its toll on every single country, including the United States.
Savers and banks alike are labouring under the protracted spell of zero interest rates. Isn’t it long overdue for monetary policy in Europe to return to normal territory?
Here in Germany, we are experiencing one of the longest periods of expansion in post-war history. The euro area is now enjoying broad growth as well. At the same time, monetary policy is roughly as expansionary as it was when the crisis was raging. The outlook for inflation is now consistent with our definition of price stability. That’s why it’s right to start the process of normalisation. All the more reason for governments in particular to get used to the idea that interest rates are going to pick up again and to run down their debt.
What are you calling for, specifically?
People tend to forget that the 3% of GDP limit for new borrowing was designed to be a ceiling and that the agreed goal is to achieve a structurally balanced budget. Governments need to make hay while the sun is shining – that is, the euro area countries should build up financial buffers which can have a stabilising effect in a future downturn.
But most euro area countries don’t have much financial leeway of any substance.
Some of them have already achieved a structurally close to balanced budget and are even running up surpluses. The Netherlands, Malta and Luxembourg are just three countries I could mention here, and they are also below the 60% debt-to-GDP ceiling. Germany, too, has been registering a perceptible surplus and will soon be back below the 60% mark. That said, the debt-to-GDP ratio in the euro area as a whole is currently only a little down on its peak during the crisis. There are five countries in which that ratio will clearly exceed a level of 100% once again this year.
What’s your take on developments in Italy?
I assume that the new government is aware of its European commitments and that it will table a sustainable budget, if only for its own sake. You see, there’s no point in budgeting for measures that cannot be funded because the risk premiums on government bonds increase. In any case, the latest remarks by the government are pointing in the right direction.
There have been calls in Italy for the ECB to press ahead with its asset purchases as a way of keeping Rome’s borrowing costs low.
That’s something that ECB President Mario Draghi has firmly rejected. Monetary policy isn’t there to shield governments from what their own actions do to their borrowing costs. What counts is that the markets can send out a signal, in the form of higher interest rates, when they believe that debt sustainability is in jeopardy. The central banks’ government bond purchases have already weakened this effect, but it would be wrong to disable it altogether.
Has the ECB itself been raising false expectations with its asset purchases?
That’s a question I will leave unanswered. What I will say, though, is that these are risks I have drawn attention to, time and time again. However, the current asset purchase programme is not targeting risk premiums – far from it.
Mr Draghi did “whatever it took” during the euro crisis to keep the euro area intact. If a fresh crisis erupted, how far would the ECB be able and allowed to go?
Our job is to keep prices stable. What this also means, for instance, is that we can provide an abundant supply of liquidity if a crisis strikes to keep our monetary policy effective. But the euro area will only be stable over the long run if public finances are sound and the economies are agile enough to thrive in the competitive arena. This is a matter for politicians to address, not the central bank.
What needs to happen at the European level to improve cohesion in the euro area?
One takeaway from the crisis was that more needs to be done to bolster the euro area’s architecture. Major progress has already been made on this front, in the shape of the banking union and the European Stability Mechanism. As for what is still left to do, however, many of the proposals currently on the table would end up further communitising risk, but without any commitment on the part of the governments to surrender any sovereignty in return. Liability without control is problematic in my view.
Have you got any better suggestions?
We should start off by talking about policy areas where there are strong cross-border effects – that is, areas that can be better dealt with at a common European level, such as climate protection, defence, border protection, migration policy and digitalisation. Once these tasks have been defined, we can negotiate a common European funding arrangement which can potentially also act as a macroeconomic stabiliser. But talking about the money first is putting the cart before the horse.
One plan concerns an insurance scheme for bank deposits at the European level. Is it realistic to expect the countries to accept risk weights on their bonds in return, as you are demanding?
The very close relations between governments and banks in the euro area were one factor which fanned the flames of the crisis. But if you ask me, applying more risk-appropriate treatment to government bonds held on bank balance sheets is just as much a prerequisite for establishing a European deposit insurance scheme as the rigorous reduction of legacy assets. It would be wrong for us to indirectly communitise potential fiscal problems by way of a common deposit protection arrangement. Another crucial point is that the community should only be liable for what the community can control.
The financial crisis reached its peak ten years ago. How much safer is the world today?
The system has been made more robust – banks, for instance, have more capital and thus bigger risk buffers. On the Financial Stability Board, we are currently debating whether there are any regulatory gaps and whether the regulatory objectives can be achieved efficiently and with a minimum of side-effects. But there’s no such thing as a market economy that is totally crisis-proof. Our task is to make crises less likely and reduce their impact when they do occur.
On that note, what’s your view on the poor profitability of German banks?
One reason for the poor profitability is the tough competition in Germany’s banking sector, which can benefit customers in the shape of a better and cheaper range of banking services. Another is the current low interest rate environment, of course. And it’s safe to say that some business models could stand some scrutiny. Altogether, the weak profitability is making it difficult for banks to build up additional equity capital.
Finance Minister Olaf Scholz has taken a stand for strong German banks and spoken about an industrial policy of a sort for the financial sector.
My reading of his remarks is that he is calling for strong banks in the sense of partners for German multinational businesses. And he’s certainly right on that score. But I would be cautious about pushing for mergers on political grounds. Mergers need to have a strong business case. We haven’t found government intervention to be beneficial in this field.
It was only though international cooperation that it was possible to damp down the financial crisis ten years ago. Would that kind of collaboration still be conceivable nowadays?
Central banks are as willing as they ever were to cooperate, even if international cooperation has certainly become more difficult at the political level.
How do you find the international atmosphere?
The climate might have become a little rawer, but I’ve also found that there are many who feel that now is a particularly good time to strengthen international cooperation. The trade dispute with the United States is acting as a cue for other countries to do more to dismantle trade barriers between them. Just take the EU’s negotiations with Japan or Mexico.
European politicians are looking to give the euro a bigger international role, for example as a global trade currency.
We work hard to keep the euro a stable currency that is accepted by the general public and businesses alike. As a result, it is frequently traded in global markets and held as a reserve currency, and it ranks as the second most traded currency in the world, after the US dollar. But that is not a monetary policy objective.
Wouldn’t you agree, then, that it's absurd that contracts in the aviation sector, say, are sometimes denominated in dollars?
That’s not a vote against the euro. The question of which billing currency to choose often depends on a sector’s particular characteristics. In the aviation industry in particular, I would expect the global magnitude of the market and the links to the oil sector to give the US dollar the edge.
What do you think of Heiko Maas’s idea to create what would be, in effect, a parallel payment system as a way of circumventing US sanctions such as those imposed on Iran, for example?
Mr Maas’s unwillingness to accept the extraterritorial nature of US sanctions is something I can well understand. But the crux of the matter is that many businesses and banks have links with the United States in one way or another. So I imagine it will be difficult to get around US sanctions by building up a parallel system for payments.
Let’s look to the future. Is the glass half full or half empty for the euro area?
The state of the world right now does show that we can best represent our interests together. That also includes a monetary union which remains intact as a union of stability. This will call for an immense effort, but I’m optimistic on that score.
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