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Did you vote against the government bond programme on principle or because you believe that it simply won’t work?
I see a number of arguments against the programme. They include stability policy principles and the question of whether the central bank has a democratic mandate for a measure of this kind. The programme spreads liability risk among euro area taxpayers. That is something only parliaments are allowed to do, and the rescue packages are the right tools for the job. Central bank funding must not become entrenched as a catch-all solution to all our woes. And then there’s the question of whether the programme ultimately does more harm than good. If central bank assistance eases the pressure on politicians to push ahead with reforms, that could hinder and delay the process of overcoming the crisis.
And that, in turn, undermines the credibility of monetary policy.
If the central bank moves into that kind of territory, it could become ensnared by its own policy and forfeit some of its credibility.
Why were you unable to convince the other Governing Council members with those arguments?
Most of my colleagues were evidently convinced that these concerns, while justified, could be addressed by designing the programme appropriately. They certainly did take my arguments and concerns on board – even though my overall assessment of the programme still ultimately differs from theirs.
ECB President Mario Draghi has cited disruptions in monetary policy transmission as the reason for setting up the new programme. That does indeed seem to be a problem; the ECB’s most recent interest rate cut failed to reach some euro-area countries. Do you also believe that there are disruptions in the monetary policy transmission mechanism?
We have been hearing that argument ever since the first government bond programme was launched in 2010, and yet we are still talking about disruptions in the transmission mechanism today. So my question is: faced with structural problems such as a lack of competitiveness and a loss of confidence in some countries’ public finances, are government bond purchases really the right tool for repairing the monetary policy transmission mechanism?
But you agree with the diagnosis?
Our monetary stimuli are still being transmitted, but our monetary policy is not currently reaching all euro area countries in equal measure. That fact is connected, not least, with the lack of credit demand in some countries and the deleveraging process in their banking systems. Yet these adjustments are all appropriate and necessary to enable these economies to stand on their own two feet again.
Do government bond risk premiums actually reflect the fundamentals at all any more or are they partly down to the irrationality of the markets?
Ideas about what is a fair interest rate level based on the fundamentals differ very widely and have a large subjective component. However, I wouldn't say that the markets’ actions are completely irrational at present; they are based on concerns that the reforms in some countries could grind to a halt. These reforms and, above all, the question of whether they will actually be pursued in the future have a major impact on the growth outlook and thus also on credit risk.
So it would be best for the ECB to do nothing, to simply wait for the storm to pass?
Not making government bond purchases certainly wouldn't imply that the Eurosystem was merely waiting for the storm to pass. In fact we have already done a great deal: the interest rates are at a historic low, the banks have access to unlimited liquidity, the collateral regime has been loosened several times, the ECB has already purchased government bonds and covered bonds.The Eurosystem has taken a whole range of steps, but we must not ask too much of monetary policy.
If the ECB had not set up the government bond programme and politicians had done too little to remedy the problems, causing the crisis to escalate,wouldn’t the ECB have had to intervene anyway to stabilise the financial system?
I don’t believe that the system would have collapsed if the ECB had not set up the government bond programme. In the past, many euro-area countries coped with yields of 7 per cent or more – not just for new bond issues but also on average. Today, the affected countries could likewise ride out higher yields on new issues for a certain length of time. In the present situation, it is vital to do what is necessary to ensure that investor confidence improves and risk premiums fall. We have to ask ourselves whether central bank bond purchases create the right incentives. The rescue packages can help us to buy time where necessary.
That sounds like an argument for the kind of conditionality built into the new ECB programme: acting only when governments have initiated reforms.
If one does choose to embark on a programme of that nature, credible and strict conditionality provides a certain degree of protection.
Is this a good way of sending the ball back into the politicians’ court so that they finally do their homework?
It would seem so at first glance – but we mustn’t overlook the risks involved. Monetary policy is in danger of becoming dependent on political decisions, and it is unclear whether it will then be able to free itself from the clutches of fiscal policy. This ultimately binds monetary policy into the rescue packages. In addition, conditionality has to be credibly enforced; that remains the main challenge.
What about the risk of the ECB itself incurring losses as a result of the new government bond programme?
That’s another problem. One of the principles of our monetary policy is that our transactions should entail the least risk possible. Yet the Eurosystem will take on substantial risks by making these purchases.
The ECB will probably soon be given an additional mandate for banking supervision. How do you view this development?
In principle, the banking union – which encompasses European-level banking supervision – is a useful addition to European monetary union. Its main aim is to ensure that the euro-area financial system is more stable in the future, and that will also benefit the euro area’s single monetary policy. However, I see the banking union as a project for the future and not as a solution to the current problems. A communitisation of legacy balance sheet burdens would be tantamount to a transfer payment and should not be concealed under the cloak of the banking union.
But making the ECB responsible for banking supervision is not the only conceivable option. Aren’t you concerned about the ECB having conflicting objectives?
That is a crucial issue and it also featured very prominently in the debate on supervisory reform in Germany. We need a clear separation between supervision and monetary policy to ensure that there are no points of conflict with central bank independence and the objective of price stability.