Interview with Financial Times
Interview with Yves Mersch, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, conducted by Martin Arnold on 23 November 2020
25 November 2020
How much does the second wave of coronavirus infections and lockdowns darken the eurozone economic outlook?
Governments have learned very rapidly with this pandemic and the recent set of lockdown measures have been much less growth-damaging and much more targeted so the fallout might be mitigated. We also have an extension of the support measures that have been very helpful with the first lockdown and the fiscal response also has to be factored in. What we can see right now is that there is an increase in fragmentation, insofar as we have a divergence between the services sector and the manufacturing sector. That means some countries' economic structures are hit more or less depending on how dependent they are on the services sector and within the services sector those areas that are more exposed to the pandemic consequences and the lockdowns.
Do you expect a double dip recession?
We believe it will probably be difficult to maintain positive growth going into the fourth quarter, although if I look at the German figures, Germany might achieve it. Other countries clearly might not achieve it and overall it would not be surprising if after a very bad month of November we had zero or even negative growth. However, as of today it is premature to draw the conclusion that this will last into the next quarters of next year and there will be consecutive quarters of negative growth. In the course of 2021 we will have available several vaccines, which alleviates also the logistical challenge.
What would you like to be the outcome from the ECB’s current recalibration of its monetary policy instruments?
Calibration has different meanings. It could be rectification. It could be simply an extension on the time axis. It could be an extension of the volume or the intensity. We said we would look at all our instruments and would take a decision on how we can be most efficient. It is true that we have our whole panoply of instruments available. We have seen that in these circumstances some have a higher amount of traction than others and those that have had in our opinion a rather good amount of traction have been the Pandemic Emergency Purchase Programme and the Targeted Longer Term Refinancing Operations. We said they would run until at least June next year. Since the consequences of this pandemic probably have a longer duration than foreseen when we took the latest calibration decisions in the summer, an obvious candidate for calibration is the timeline extension. There is a second approach, to see whether we should become more targeted or more focused, or on the contrary consider now untested instruments, a theoretical possibility in an all encompassing discussion.
Could the deposit rate be cut further - for instance if the euro continued to appreciate against the US dollar?
It is an instrument that is still there. We have very little knowledge about when the reversal rate would be kicking in. However, I also admit that I would rather not test that by all means, as it could diverge from one country to another. My belief is in this respect that confidence of the public in its central bank is something we should not lose sight of.
Given the increase in national debt levels, is there a danger of fiscal dominance, in other words of monetary policy becoming subservient to fiscal policy?
Obviously if you have no public debt on your books, the risk of fiscal dominance is further away than if you have it. However, you should not forget in this debate that compared to central banks in other jurisdictions we are from a legal point of view particularly well protected as we have the prohibition of monetary financing in our primary law and our independence is also enshrined in the treaty. It is true that we have seen over the last couple of months an increasing number of voices who have ventured into that territory of monetizing national or local debt. These voices do not seem to measure the consequences of such ideas on the favourable financing conditions we have achieved and the risks to an unfinished EMU architecture. But again we are lucky in that we have primary law that protects us. And the ECJ protects the rule of law.
How is the ECB’s strategy review likely to change its inflation target and should it follow the US Federal Reserve in shifting to average inflation targeting?
We have taken note of the FED decision, but we have a mandate for European circumstances that are different. If you want to be well understood you should be simple. I can see the argument in having an objective that is formulated in a simpler way than it currently is where we use several words - close to but below 2% - but this is an ongoing discussion and if time comes the Governing Council will inform about the right decision.
How far should the ECB go to tackle climate change?
It is not our principal policy mandate, but we have a nudging capacity through the size of our balance sheet to be supportive of those decisions that the people with political legitimacy will have to take. But we cannot substitute for them, that is clear.
How worried are you that Poland and Hungary’s opposition could scupper the EU recovery fund?
I agree it is not pleasant to see this dillydallying. It is not always very dignified either. But you know this is very often the case in Europe: we are not very fast in decision-making. But at least we are not going backwards. So I am quite confident that in the end our leaders will find a solution. The fiscal policy decision-makers are fully aware that they cannot squander the positive benefits of the announcement of these measures in the financial markets. Even those who have more difficulties coming into line, why would they do damage to their own economy?
The mood currently seems to be that governments should spend, spend, spend and worry about debt levels later - but are we storing up problems for the future?
It is inevitable that excessive or unsustainable levels of leverage in whatever sector of the economy is always a matter of concern especially from the financial stability perspective. We have also seen that as of late, banks have increasingly unloaded exposures from their balance sheet to the sovereign again. Very often these exposures are to do with public guarantees that have been extended to the corporates. So it is a corporate-sovereign-bank nexus. As long as the interest rate is below the growth rate, I think the issues of sustainability might not be in the foreground; however, we have a mandate to respect price stability and we could not look the other way if there were to be inflationary pressures, which we do not see at this point in time.
We have seen very high levels of debt. Calculations have also shown that if we increase our productivity by accelerating the integration of technological innovation, growth will be able to offset the accumulated debt. On the other hand, one cannot exclude a tail risk to the other extreme, at least not in theory. So we have to follow this and monitor it quite closely.
Is Andrea Enria, Chair of the ECB Supervisory Board, right to warn of a potential €1.4tn surge in bad loans for eurozone banks?
The figure is correct - but it is based not on our central, baseline scenario but on a severe, extreme scenario. As of today, I do not see an economic situation that is going to lead to a severe scenario. Some banks had scenarios in their internal models, which were not central scenarios, but were very rosy scenarios. That is why we called on the banks to consider the main scenarios from public authorities, international organisations, or even their own countries.
The second point is that we told the banks that the debt moratoria cannot last forever. There is no reason for them not to already be following up on the debtors’ real health and on whether some of the debtors have simply frozen and are able to start activity as normal again or whether their situation has deteriorated because their business model has been greatly affected due to this pandemic and that would make for a different viability assessment.
Does this mean the banks should not be allowed to restart dividend payments and share buy-backs at the end of this year?
Banks entered into this cycle with stronger capital buffers than was the case in the previous financial crisis. But on the other hand we have seen that the increase in the solvency ratio has been largely the effect of monetary policy and regulatory decisions. That means we have relaxed some of our standards, creating additional capital available for the banking system to an amount about three to four times the intended distribution of dividends. So to some extent it would be a little bit spurious or surprising if the banks were to use the public subsidies to enrich the shareholders. As long as the banks are dependent on such support and they are asking for continued support I think we should be very conservative with the pure resumption of payout ratios that we have seen before the crisis.
That does not mean that we would in all cases need to maintain a blanket ban with legal uncertainty as we have only an enforcement instrument in our regulation based on a case-by-case approach. In other jurisdictions, there also seems to be a move towards a case-by-case approach. It would all depend on the conservatism of internal models in the banks, on conservatism in provisioning and a sound view of the capital trajectory of a bank. All this will need to be taken into account and then we will come to a proposal by the end of the year.
Is the financial sector doing enough to prepare for the UK leaving the EU single market?
By and large a lot has been achieved but more could still be done. We hear from banks that it is their customers who are not willing or not easily convinced. I also do not underestimate that the overall amount of contracts that required repapering or novation was gigantic and this work is still ongoing. There are individual cases where we are continuing to push and where what has been announced in the Brexit plans needs to be implemented. There are some instruments like uncleared derivatives - where the difficulty seems to be larger than in other contracts.
There might still be cases for UK entities where, for instance, if on 1 January there is no Brexit agreement, there is a risk that they would act on the continent with neither the proper authorisation nor the licence to provide services to EU clients. Extensive use of third country national regimes could also pose risks to the level playing field and could undermine the integrity of supervision as banks and investment firms may unduly use these regimes and other national exemptions in order to avoid the European banking supervision. We will follow this.
Our message is clear: EU products and transactions with EU clients should be booked in the EU. Risk management capabilities related to these products should also be located in the EU.
Having been on the ECB Governing Council since the start in 1998, how has it changed in that time and what lessons do you draw from your experience?
At the beginning in ’98 the priority was very clearly on overcoming our natural instinct of behaving like the council of ministers - that means in an intergovernmental way - while we were supposed to react in a more federal decision-making way. That absorbed quite a lot of our energy. Wim Duisenberg can take great merit in this respect and especially also the second president, Jean-Claude Trichet, who put a great deal of energy on trying to connect with all the members to bring them on board before any decision was taken. We then entered into more permanent crisis management mode under the third president. He also was a great listener. His listening was not though exclusively to the internal institution. And the new president again puts a lot of importance on being inclusive, on being cohesive as a Governing Council. So you see there are cycles in the life of the institution that have to do with leaders inklings, but also with the members of the decision-making bodies. That means that people must be able to look beyond their home base and try to have an understanding of the intricacies and the structures of their neighbouring economies.
The amount of disagreement has been mostly at the fringes. For example, there are people who are much more concerned about the immediacy of the consequences of an external shock and its containment and there are others who would very much at the same moment also like to keep in mind the longer-term consequences. These are natural and even useful confontations of valid points of views.
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