Interview of Benoît Cœuré, Member of the Executive Board of the ECB,
conducted by Mark Schrörs of Börsen-Zeitung
Mr Cœuré, the last two bailout programmes have failed to get Greece back on its feet. What makes you think that this time everything will be different and this third programme will turn Greece into a “thriving economy”, to use the expression recently employed by Mario Draghi, President of the European Central Bank (ECB)?
First of all, you have to remember where we started in 2010. Back then, the Greek economy was enormously imbalanced and inefficient. It was – and remains – clear that the process of getting Greece back on its feet will be long and hard. However, we should also not forget that at the end of last year Greece was gradually recovering. Positive growth was being forecast for 2015, and the banks had been able to obtain capital from the markets in 2014.
But then Alexis Tsipras’ leftist government came to power.
This year has seen a lot of trust destroyed, and reforms have been reversed. That has been a real setback. But Greece can build on what it has achieved under the first two programmes, and the new memorandum of understanding has everything it needs to give the Greek economy considerable support. I would like to stress two things in this regard. First, we have the right mix as regards fiscal measures. Ambitious medium-term budgetary objectives have been set, without the economy being strangled in the short term. Second, there is a strong focus on structural reforms. Looking back, one could say that if there had been more focus on structural measures – such as the reform and opening-up of markets, improved tax collection and the fight against interest groups – from the start, that would have reduced the burden that adjustment placed on the most vulnerable in society and speeded up Greece’s recovery.
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Up to €25 billion is planned for the recapitalisation of the Greek banks. Will that be enough? And would the ECB be in favour of all that money being handed over right at the outset as one large initial payment?
We believe that the recapitalisation of the Greek banks should take place as soon as possible. The banks’ ability to grant credit is an important precondition for growth. However, first we need detailed information about the situation. For that reason, banking supervisors at the ECB have started a new asset quality review and stress test for Greece’s four major banks. Those credit institutions were adequately capitalised, but they are now operating in an extremely difficult economic environment, and non-performing loans are likely to increase in the next few years. It is quite clear, therefore, that the banks will require more capital. How much remains to be seen. The banking supervisors will need a few weeks to conclude their assessment. For that reason, the recapitalisation should not take place immediately. But it should happen before the end of the year, taking into account the existing resolution and competition frameworks. It is also important, though, that we do not just put more money into these banks. We need to ensure that this achieves the desired objective.
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Once this third programme has been agreed, can the capital controls be lifted?
That is not for the ECB to decide. It is a matter for the Greek government. As long as there is uncertainty regarding the future of Greece’s banks, the government in Athens should tread very carefully. I do not see scope for substantially relaxing Greece’s capital controls until it is clear how and when the banks will be recapitalised.
Will the Governing Council of the ECB immediately reapply the waiver – i.e. the exemption under which the bonds of a country with a poor credit rating are accepted as collateral if the country is in a programme – once Greece’s third programme is agreed? That would be an enormous help to Greece.
The Governing Council has not yet discussed that.
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But does the Governing Council not need to wait for the initial assessment by the creditors, which is scheduled for October? That is also relevant as regards the question of when Greece could benefit from the ECB’s bond purchase – i.e. quantitative easing (QE) – programme.
We could potentially act earlier. Greece’s new programme contains a large number of “prior actions”. The question for the Governing Council will be whether these preliminary measures are sufficient to meet our criteria.
This is the first time that the potential for a country to leave the euro area has been publicly discussed. Is the euro area now just a fixed exchange rate system?
It is crucial for the stability of the euro area that there is no doubt that participation in the euro is irreversible. Now there is such doubt. The discussion about Grexit has undoubtedly caused instability in this respect. It is like a fine hairline crack that can lead to a major fracture. Consequently, it has to be repaired now. This is particularly important for us as a central bank. We do not decide who belongs in the euro area. That is a political decision. But the ECB's working assumption is that a country’s participation in the euro is irreversible. This is also how we have dealt with Greece and why the provision of liquidity to Greece could be sustained.
And this repair should take place by means of more integration?
Yes, absolutely. The right response now is to strengthen the euro area. This requires a series of measures, with two aims. First, a greater sense of responsibility is needed at the national level. Greece is undoubtedly an extreme example, but it is also a useful warning of what happens to confidence when a country departs significantly from the consensus and the agreed rules. This kind of thing must never happen again. Second, we need more risk sharing, meaning solidarity for countries which have experienced shocks.
And more solidarity means transfer payments between euro area countries?
No, euro area solidarity does not mean permanent transfers. It is about supporting a country which is in difficulty, but only temporarily, and it is conditional on efforts being made to return to balance. The euro area is based on the principle that it is not a transfer union. One can dream of a completely different model – a federal state with transfers which are legitimised by a common political institution – but that is not the system we have today, and I do not see any political will to change that.
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Let’s talk about monetary policy. Some economists are already speculating that the renewed drop in oil prices could ensure that the inflation rate, which was 0.2% in July, falls below 0% again. Longer-term inflation expectations have also fallen again slightly. Are you starting to get worried again?
We do not wake up every morning and look at the economic indicators in order to decide whether to raise or lower interest rates or whether to stop or expand QE. We have a medium-term perspective. We have oriented our monetary policy stance – with low and even negative interest rates and forward guidance, together with bond purchases – towards a long time horizon. Hence, we have said that those purchases can run until at least September 2016, or later if necessary. There was a good reason for this long-term focus, namely that the economic recovery is still weak and is only gradually strengthening.
So, at the moment you do not see any need to act?
Our monetary policy decisions are gradually finding their way into the provision of credit and the real economy, even if only slowly. We therefore want to keep a steady hand. We would only see ourselves forced to act if there was a fundamental change in the economic situation or the monetary stance was materially altered because of developments in the markets – for example, in the event of a sharp increase in long-term bond yields. So far, I am not worried by what I am seeing.
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And, are they resilient enough? Or should we be worried that the first US interest rate rise since June 2006 will cause chaos in the markets?
We have been living with very low interest rates for a very long time. The challenge is to ensure that market participants recognise that the future regime will be more like it normally was in the past – with higher interest rates. There is a risk that some have forgotten what that looks like. That also applies to us in Europe. It is extremely important that our unconventional monetary policy does not damage financial markets.
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At the moment, market participants are focusing almost exclusively on what central bankers have to say. Is that not dangerous, and does that not lead to more volatility?
Central banks have always influenced the markets – that is how monetary policy works. At the moment, however, there is exceptional nervousness worldwide. The prospective change in monetary policy in the United States and the United Kingdom is contributing to this, as are worries about China and emerging economies and major geopolitical risks. At the same time, market participants are making important changes to their business models and adapting to new regulation. This uncertainty and volatility cannot mean that we stop doing our job. We must nevertheless be extremely careful. In an environment of great uncertainty, we as the ECB should look beyond short-term volatility and stay calm.
Concern about a hard landing for the Chinese economy has recently been growing. How concerned about this are you?
The depreciation of the renminbi can be seen as a symptom of a slowdown in the Chinese economy, at least in the export sector. That is a reminder of the major global uncertainty that we face. Here in the euro area, we should see this as a warning about the importance of strong domestic demand. Strong exports are a sign of competitiveness, and as such they are a good thing, but it would be unreasonable to base the long-term growth model for the euro area on exports alone. That would make us totally dependent on global growth, particularly growth in emerging market economies. Euro area countries must strengthen domestic demand, and above all private investment, in order to make themselves more resilient.
What is your assessment of the Chinese central bank’s decision to change the way in which the renminbi is pegged to the US dollar, which has led to a strong devaluation and stoked fears of an increased currency war?
Fundamentally, it means a step towards an exchange rate system which is more strongly determined by the markets. That is generally a good thing; it strengthens the resilience of the global economy and is in line with the G20’s recommendations. Within this framework, I trust the Chinese authorities not to use the exchange rate as a policy instrument. That would go against the recommendations of the G20.
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There are also repeated discussions as to whether the ECB should act as a guarantor in the financing of euro area governments – similar to what the Federal Reserve does in the United States. What do you think of that?
If “guarantor” means that the ECB fosters trust in the irreversibility of the euro and ensures stability, that is already part of our mandate. If it means that we become a lender of last resort for governments, the answer is a clear “no”. The monetary financing of governments is prohibited by the Treaty on the Functioning of the European Union, and that gives us important protection. Some people in Europe would like to amend that part of the Treaty, but that would be very dangerous.
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Full interview
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