29 December 2015

ECB's Mersch: Interview with International Bankers Forum

Interview with Yves Mersch, Member of the Executive Board of the ECB, conducted by Inken Schönauer and Andreas Scholz

Is -0.3% now the floor for the penalty interest rate?

The ECB’s President, Mario Draghi, has not confirmed that. But we are well aware of the possible negative consequences of our decisions. Every time the Council meets, we check whether the cost-benefit analysis still applies. In theory, -0.3% is not necessarily the lower limit.

The ECB President himself once said that the lower limit was -0.2%. But even he is no longer sticking to that. Why has there been yet another drop?

The situation has changed. Our focus is on effectiveness, and analysis has shown that it would make no sense to do without an instrument that has the potential to be very effective.

So, what does a further small step like this achieve?

The rate of -0.2% was already having an effect. That is now being reinforced.

Switzerland is already down to -0.75%.

There’s no comparison at all. The euro area has a much larger internal market. The exchange rate is an entirely different matter in Switzerland. We are working for the euro area.

Again, a follow-up question: what will happen if Europe slips back into recession, with the interest rate level not having risen sufficiently for interest rates to be lowered again. What can the ECB then do?

In theory, it would then be the turn of fiscal policy. I’ll pass this question on to the national governments. Consequently, budgetary policy must now be at the top of the agenda. It must be possible to use budgetary policy in the next cyclical downturn. The various economic policy-makers must live up to their responsibilities and not simply rely on monetary policy.

You were not always a supporter of the ECB’s current policy, especially the QE programme. Why has your attitude changed?

It has changed entirely in two respects. I can honestly say that the effectiveness of the programme has come as a surprise to me. If we had not started the QE programme, growth might have turned negative again. We would have had recessionary deflation in many parts of the euro area. That would have been devastating for the democracies of the euro area. I also warned about the risks that the programme could entail, but they have not materialised thus far. What we are seeing with property prices, for instance, is not a worry. The BIS [Bank for International Settlements] also noted that recently.

Let’s go back to the ECB’s mandate for a moment. The low interest rates and regulation are significantly affecting the performance and strategies of banks and insurance companies. Is the ECB allowed to do that?

On the specific subject of regulation, the rules are not made by the ECB; it just implements them. It was the G20 that drafted them. What concerns us in this context is the need for a level playing field. We in Europe have established protectionism for banks which is no longer acceptable and is fragmenting Europe. We need a level playing field in order to achieve the necessary adjustment. Europe is still “overbanked”. Further consolidation is necessary.

Full interview

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