29 May 2018

ECB Vice President Constâncio: 'Italy Knows the Rules'

In an interview with Spiegel Online, outgoing European Central Bank Vice President Vítor Constâncio issues a timely reminder that ECB assistance is tied to conditions, but insists the eurozone is in good shape despite the problems in Italy.

[...]SPIEGEL ONLINE: Have the countries in the southern part of the euro area done enough on their side to fix monetary union?

Constâncio: Yes. The countries hardest hit by the crisis had high budget deficits and high current account deficits at the start of the crisis. So they were importing a lot more than they were exporting. But a great deal has been done since then. In the meantime, all the countries concerned have a primary fiscal surplus, which means that they are reducing their debt bit by bit. And all these countries now have a current account surplus; they are exporting more than they import. That is quite a turnaround.

SPIEGEL ONLINE: These achievements are now hanging in the balance because one country may no longer want to do its part. Even if their attempt to form a government has failed for now, Italy's two dominant parties are both skeptical of the common currency. They want to push through massive tax cuts and increase spending dramatically, despite that fact that, at 132 percent of gross domestic product, Italy has one of the highest levels of sovereign debt in the world.

Constâncio: It is certainly a challenge, first and foremost for Italy itself. When financial markets attacked Italy in 2012, it demonstrated that perceptions on the financial markets can be volatile and the risk assessment of a given debtor can change abruptly, sometimes with severe consequences - and this even though Italy already had a primary surplus at the time. We will have to see what happens now.

SPIEGEL ONLINE: Risk premiums for Italian government bonds have risen sharply again recently. At what point would the ECB intervene again, as it did in 2012?

Constâncio: I would like to stress that every intervention has to contribute to the fulfilment of our mandate and is also subject to conditionality. The Outright Monetary Transactions program for intervening in national sovereign bond markets of vulnerable countries can only be used if the country in question also agrees to an adjustment program. The rules are very clear on this. Everyone should remember that.

SPIEGEL ONLINE: So if Italy wants to circumvent the EU's fiscal rules, it can't necessarily count on the ECB's help?

Constâncio: I will only say that Italy knows the rules. They should perhaps take another close look at them. [...]

SPIEGEL ONLINE: Would it have been easier to resolve the crisis if the German approach had not been so dominant?

Constâncio: Yes, I think so. Germany is a very successful country, and its success is built on a strong set of rules and respect for those rules. And things have gone very well for Germany since World War II. But this strict approach also has a weakness in times of crisis, particularly when a fast and flexible reaction is required. The reaction to the financial and sovereign debt crisis could have been quicker, and more flexible. That is my personal view. We have learned from the crisis and are in the process of fixing monetary union. But a few more steps still need to be taken. Most of all, we need much closer coordination of fiscal policy - and a stabilization fund that can absorb sudden significant shocks. And the banking union is not yet complete.

SPIEGEL ONLINE: French President Emmanuel Macron wants to eliminate those very shortcomings and thereby change the fundamental features of the euro area. His plans include a common European budget, a European finance minister and a common deposit insurance scheme for European banks. Can you understand that the German government is resisting many of these plans?

Constâncio: I think one of the reasons for hesitation on the part of many European governments is that the euro area is currently going through a phase of very robust economic growth. When times are good, it's always difficult to undertake reforms, because there doesn't seem to be any need. In the past, significant EU reforms were always decided on at the height of a crisis. But that also makes them more expensive.

SPIEGEL ONLINE: Will it take another euro crisis before we have a banking union?

Constâncio: You'd think that the banking union would be the easiest of these reforms. What we need most of all here is to introduce a common European deposit insurance scheme, so that the savings of bank customers are protected at the European level if a bank fails. That would further strengthen confidence in the euro, because our money essentially consists of bank deposits.

SPIEGEL ONLINE: Right now, Germany is balking at the idea of this kind of mutualization - not least because many Italian banks are still harboring huge numbers of bad loans on their balance sheets. Nobody in this country wants to be liable for that. How can this problem be solved?

Constâncio: It's already being solved. We have started to considerably reduce levels of what are known as non-performing loans in the euro area - by more than 300 billion euros since 2014. This reduction has come about as a result of the pressure exerted by ECB banking supervision. And that pressure will remain strong. [...]

Full interview

© Spiegel Online