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Interview with Der Spiegel

Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Tim Bartz and Stefan Kaiser on 1 April and published on 9 April 2021, in print on 10 April 2021

9 April 2021

Ms Schnabel, the global economy is only slowly recovering from one of the most severe economic crises in living memory, but the mood on stock markets is better than ever. Do you find that a cause for concern?

We are closely monitoring this. Developments in Europe have not been extreme up to now, but there are signs of excesses here too, for example in the real estate market. In the United States, the cyclically adjusted price/earnings ratio is now higher than it was before the financial crisis of 2008.

Have equity and real estate prices reached such heights again that they are bound to implode at some point?

High share valuations in the euro area are still justified by higher earnings expectations. But the risks of a correction are increasing, especially if the economic recovery falls short of expectations.

The collapse of the US hedge fund Archegos has just generated multi-billion losses for large banks such as Credit Suisse and Nomura. How can a single fund rock such financial giants?

That is indeed a remarkable incident. It shows that there are considerable gaps in the regulation of funds. Archegos is a family office, which manages the capital of a single person. No other investors held any equity, which is why the requirements and reporting obligations were less stringent. The fund was thus able to increase its leverage substantially without it being noticed.

But it’s even more astounding that tightly regulated banks could assume so much risk. Credit Suisse has burnt through a whole year of profits, only at the last minute did Deutsche Bank manage to sell equity stakes that Archegos had posted as collateral for loans – although it actually doesn’t want to conduct such transactions with hedge funds any longer.

There is a need to scrutinise the reasons why the banks enabled the fund to leverage up to such an extent. That could have resulted in further contagion effects.

The institutions thought that their loans were collateralised by the equity stakes held by Archegos. But as the fund was forced to sell these stakes quickly and the prices were plummeting, the collateral was no longer worth much.

Such fire sales are dangerous, as we saw during the global financial crisis. We can be glad that the effect has been limited to just a few players. Otherwise, this incident might even have morphed into a systemic crisis.

That sounds as if the financial sector’s avoidance of more serious consequences was more down to luck than good judgement. Is there a lack of regulation?

It is thanks to regulation that the banks have sufficient capital to cushion losses of that nature. But more is to be done when it comes to funds, because their regulation is predominantly geared towards protecting investors. Fortunately, it has only been a single fund up to now. Nonetheless, it is a warning signal that there are considerable systemic risks that need to be better regulated.

One of the oddities on the financial market is the bitcoin hype. The price of the cryptocurrency has multiplied, firms such as Tesla want to accept bitcoins as a means of payment, there is talk of PayPal customers being able to pay with bitcoins. Are you worried about the prospect of a new, hitherto unregulated currency emerging alongside the euro, dollar and the like?

In our view it is wrong to describe bitcoin as a currency, because it does not fulfil the basic properties of money. It is a speculative asset without any recognisable fundamental value and is subject to massive price swings.

Elon Musk would beg to differ.

He is at liberty to do so.

Currencies such as the euro don’t have any intrinsic value either, but are simply based on trust.

The euro is backed by the ECB, which is highly trusted. And it is legal tender. Nobody can refuse to accept euro. Bitcoin is a different matter.

The fact remains that many people evidently trust bitcoin. Could that harm established currencies like the euro?

My concern is more that trust in cryptocurrencies might rapidly evaporate, causing disruption in financial markets. That is a very fragile system.

The ECB is planning to introduce a digital euro itself. Why is that?

Payment systems today are far more digitalised than they used to be. That is why we need to examine what that means for our monetary system. But nothing has been decided yet. A great deal of preparatory work needs to be done to enable the project to be properly set up.

That would mean that the digital euro would only be introduced in four or five years’ time. Is that not too late?

I don’t think so. Nobody can offer a similar degree of security and data protection as the ECB. People find that topic important: as consumers, to whom do we want to disclose our data? They are surely more likely to trust the ECB than Facebook or other private operators.

The ECB has kept its policy rates at zero for years and is purchasing sovereign and corporate bonds for trillions of euro – always with the aim of boosting inflation. Prices are now finally starting to rise. When will the zero rate policy come to an end?

Yes, inflation is increasing. And as we are still far from reaching our inflation aim of below, but close to, 2%, a sustainable rise in the direction of 2% would be good news. That would mean that the economy is gaining momentum and aggregate demand is increasing. Unfortunately, that does not quite match the reality.

Why not?

Because prices are now rising on the back of many one-off effects. The oil price collapsed in 2020 and is now – starting from a low level − climbing back up, and the VAT rate in Germany was raised again in January. That has an impact, but only in the short term. Our medium-term projections show that the rate of inflation will ease again in 2022, because aggregate demand will presumably remain weak.

Many people feel that everything is becoming more expensive. Everyday inflation is perceived as being much higher than the rate officially measured.

This is a well-known phenomenon. That people perceive inflation as being too high is something we experienced when the euro was introduced, for example. We need to better explain to the general public what inflation is. It would be good to invest more in financial literacy. This would also facilitate the ECB’s task. And the measurement of inflation only captures an average, it almost never reflects an individual’s pattern of consumption.

People definitely do notice if a beer suddenly costs them €5 instead of €4.

Certainly, yet perceived inflation is heavily influenced by goods that we consume more frequently. Many people forget that electronic products, for instance, have become cheaper or have improved in quality. If prices stay the same, this actually means the product has become cheaper.

Maybe you should modify the basket of goods that you use to measure inflation.

The basket of goods is drawn from real life, encompassing the goods that people actually consume. What’s more, it’s not the ECB that decides on its composition but the European statistical authority, Eurostat. The price index is constantly being improved, and we submit our views to support this process.

In what form?

We’re talking about how to capture house prices in the future, for instance. Rents are included in the index, while the costs of owner-occupied housing have not been included to date.

Back to the global economy. The United States is vaccinating at a rapid pace and investing trillions in stimulus packages. Europe, by contrast, is falling further and further behind.

This is precisely why – besides ramping up vaccinations – it is so important for Europe to give a strong fiscal response, in the form of the EU recovery fund amounting to €750 billion. In this way Europe is demonstrating solidarity with those countries that have been badly affected by the pandemic but that only have limited fiscal space. At the same time, it is important for the European economy as a whole, and hence especially for an exporting nation like Germany.

No money has been disbursed yet.

That should happen pretty soon. In fact, only a small part of the money is intended to boost consumption in the short run; the majority is earmarked for investment with a view to making Europe permanently more competitive, more digital and greener.

In the meantime, EU countries are seeing their debt exploding.

An increase in public debt is inevitable given the unprecedented situation, and it is also sensible so long as the spending sustainably boosts economic growth.

Doesn’t the fund highlight Europe’s weakness? A decision about a lot of money is made quickly, but then nothing more happens.

No, I’m not quite so downbeat. The money needs to be used sensibly, which takes time.

The Americans are simply making out cheques for every citizen. Has such helicopter money ever been considered by the ECB?

The money in the United States comes from the government, not the central bank. There are certainly also programmes in Europe that help citizens quickly and directly, like short-time working arrangements that are financed in part with European funds. These have been implemented and disbursed really quickly.

Yet Europe is falling behind.

Even before the pandemic, Europe was having to deal with structural problems that urgently need to be addressed. What matters in the short term is that we speed up the vaccination rollout, which will give rise to a strong recovery.

Bernd Lucke, founder of the Alternative for Germany party (AfD), has submitted a complaint to the German Constitutional Court and thereby provisionally stopped the German legislation from ratifying the recovery fund.

It is not up to me to comment on the German Constitutional Court. But it would be an economic disaster for Europe if the disbursement of the funds were to be delayed indefinitely. If that were the case, Europe would have to think about alternative solutions, but that could take some time.

Be it in Turkey, Brazil or until recently the United States under Donald Trump – heads of state in more and more countries are attacking the independence of their central banks. Do you fear such things happening in Europe as well?

No, the ECB is one of the most independent central banks in the world and is only bound by its price stability mandate. We are also protected by the fact that we act as a central bank for 19 countries and not just one.

But what about your de facto inability to raise interest rates, as this would cause euro area countries to collapse under the burden of their debt?

The best protection against this is good fiscal policy. By that I mean that states should not save during the pandemic but take on debt and use the money to invest in growth.

Sounds good, but that is not in your hand. That’s decided by governments.

That’s true, but we are bound by our mandate of price stability and are simply not allowed to finance states. And we cannot promise any government that interest rates will remain low forever.

But it will be some time before interest rates start rising again significantly, assuming our inflation forecasts are accurate. And even then, sovereign debt as a whole will not become more expensive overnight, only that part that needs to be refinanced. So higher interest rates would only have a gradual impact. What’s more, many countries raised long-term funding at low interest rates. What really matters, though, is that the European economy takes off again, in which case the debt will also be manageable.

The ECB has recently committed itself to climate protection and wants to compel banks to disclose their climate and environmental risks more transparently. Isn’t this exceeding your mandate?

We ourselves don’t pursue climate policy, that’s done by governments. At the same time, climate change is probably the biggest challenge facing humanity. All decision-makers, and that includes the ECB, need to ask themselves what they can contribute within their respective mandates.

And what is your response?

The ECB is obliged to think about its contribution to climate protection for two reasons. First, climate change has a massive impact on the economy, due to natural disasters for instance, and hence also on price stability. If we ignored this, we would not be fulfilling our mandate. And second, the ECB’s mandate requires it to support the EU’s economic policy, in which climate protection plays a leading role.

With that argument you could support any potential political objective.

This is exactly how it is formulated in the EU treaty. But that only applies so long as it does not compromise our primary objective of price stability.

Ms Schnabel, thank you very much for the conversation.


European Central Bank

Directorate General Communications

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