Interview with La Repubblica
Interview with Luis de Guindos, conducted by Tonia Mastrobuoni on 27 April 2021
3 May 2021
Are the euro area’s economic prospects likely to worsen in a scenario where coronavirus variants continue to multiply?
The current situation is bittersweet. The first quarter was weaker than we expected three months ago. On the other hand, the pace of vaccination is gaining momentum across Europe. This is good news, because it will have a major impact on the economy. For the time being, it is estimated that growth will be around 4%. We expect the second half of the year to be very positive, even if there is still uncertainty. We note elsewhere that as soon as vaccination accelerates – like in the United Kingdom, Israel or the United States – the situation normalises rapidly. I hope that we will be in a much better situation by early summer.
Mario Draghi presented a €248 billion recovery plan which also contains important structural reforms. The Italian Prime Minister has said that Italy’s destiny is on the line. You worked alongside him as Vice-President for two years at the ECB: in your opinion, can Draghi restore trust in Italy?
Mario Draghi has made a very important contribution to Europe and is now making a very important contribution to Italy. For the time being, his main contribution to Italy is that he is leading a unity government that has the support of a very large majority in Parliament. That’s very important. And the recovery plan for Italy will be key to determining the future of its economy. I also think that Draghi’s prestige and reputation have provided the glue for the unity we are seeing in the Italian Parliament. This is an excellent signal for Europe as a whole.
You knew him in your capacity as Vice-President. What’s his best quality?
He has extraordinary leadership skills, which he clearly demonstrated as President of the ECB. And this is the best quality to allow a country to look ahead with confidence.
You said that Italy’s recovery plan is important for the success of the country. As Europe’s largest plan, is it not also crucial for the continent’s recovery?
One of the problems associated with the impact of the pandemic is that its effects were very divergent. In 2020 the average decline in GDP was just under 7%. However, in the Nordic countries, the contraction stopped at 4-5%, while in countries such as Spain it reached 11%. Fiscal situations also differ widely between northern and southern Europe. That’s why NextGenerationEU (NGEU) is so important: to avoid overly large gaps between countries. It is also important that it will be financed by the common issuance of bonds, and that part of the funds will be allocated in the form of grants. Lastly, NGEU has been designed to help above all the countries most affected by the pandemic. These three elements make the plan vital. NGEU does not simply seek to be a source of funding for short-term projects, but also to stimulate potential growth in the medium term. This is also why the funds will have to be accompanied by reforms to improve the productivity and competitiveness of the Member States. That’s also why it needs to be implemented and launched very quickly. The Commission will also need to approve the different plans quickly.
European countries like Italy will also re-emerge from the pandemic with huge public debt. Some are asking for it to be reduced. What do you think?
This isn’t a solution. Not only would it be an infringement of the Treaty, and therefore unacceptable for the ECB, but it would also be an economic mistake.
On the one hand, if the debt were cancelled, national central banks would need to use the profits they make to cover the losses instead of using them to pay dividends to the governments, as they now do at the end of each year. And what’s more, a decision of this kind would jeopardise the credibility of the central bank and undermine the effectiveness of our policies.
The German Federal Constitutional Court in Karlsruhe gave the green light, conditional on the German “own resources” law. It is feared that the final ruling will undermine any ambition to move forward with eurobonds in the future. Is this good or bad news?
It’s not for us to comment on court judgments. But if the European Commission is ever able to issue joint bonds for the first time, that will be because there was a political will to do so. And this seems to me to be an important step forward.
So eurobonds would be something positive.
When an agreement was reached on NGEU and its forms of financing, the markets reacted very positively. This happened because they saw the political will behind this agreement and because they understood that European governments were firmly committed to doing everything they could to deal with the consequences of the pandemic. We need to complete monetary union. And we need to complete banking union with the European deposit insurance scheme. Furthermore, we need to work on the capital markets union and to converge towards a European instrument to pursue a common fiscal policy.
China’s economy is picking up again; soon America’s will too. How risky is it that Europe’s recovery is lagging behind?
The situation in the United States is more comparable to the situation we have here in Europe. Still, in 2020 economic activity in the United States contracted only half as much as in the euro area. And now, according to the Federal Reserve, the US economy will grow very rapidly, by 6.5%. If you compare monetary policy programmes and fiscal stimulus on both sides of the Atlantic, they are similar. In 2020 the fiscal effort in Europe reached 8 percentage points of GDP, which was helped along by automatic stabilisers. And now we have NGEU, a generous and ambitious plan. The main difference is that it has not got off the ground yet, but I hope that it soon will, and we will then be able to quickly bridge the gap with the United States.
Nevertheless, this gap already seems to be having some unwanted side effects, at least for the ECB. The markets are jittery, they are worried inflation could increase in the United States and spread to Europe. Are these concerns justified?
The US recovery started earlier and it’s true that it has led to an increase in nominal yields for government bonds. This is natural given that we are starting to see things get back to normal. The vaccination rollout in the United States has been very fast, and their fiscal stimulus programme is very ambitious. And alongside the recovery, the markets also expect inflation to increase, which puts pressure on yields. At the ECB we have tried to counter this and we have succeeded: European bond yields have been very calm since March. The markets have understood that the United States are further ahead in the recovery cycle and that, based on the economic fundamentals, the pressure on yields was unjustified.
But there are still fears that the Fed could soon be forced to take a less accommodative stance, which would ramp up the pressure on the ECB.
The normalisation of monetary policy should go hand in hand with the normalisation of the economy. Once the pandemic is over and the economy starts to get back to normal, then obviously monetary policy will also have to start doing the same. An emergency programme like the pandemic emergency purchase programme is temporary by definition and designed to deal with the economic fallout from the pandemic. But – and this is key – any withdrawal of these extraordinary measures must occur in step with economic developments, and we need to pay extremely close attention to this. Phasing out stimuli too soon could stymie the recovery. At the same time, prolonging emergency measures for too long may run the risk of moral hazard as well as the zombification of parts of the European economy. So we need to take a balanced approach.
Some members of the ECB Governing Council are already calling for tapering in the light of a recovery in the second half of the year. Are they right to do so?
I don’t have any preconceived notions in this respect. The way in which the economy develops will be the deciding factor. If by speeding up the vaccination campaign we manage to have vaccinated 70% of Europe’s adult population by the summer and the economy starts to pick up speed, we may also start to think about phasing out the emergency mode on the monetary policy side. The manufacturing sector is already doing very well; services are still lagging behind but should soon be able to recover and close the gap with the industrial sector. We hope that in a year’s time the pandemic will be behind us, social distancing will be a memory and the economy will be back to pre-pandemic levels: monetary policy will have to adjust to that.
So you can think about raising interest rates?
No, that’s not what I said, I was referring to a cautious exit from the emergency programme, and I said that it should be managed with a great deal of prudence.
Are you concerned about the strengthening of the euro?
As you are aware, the exchange rate is not one of our monetary policy objectives. But it is definitely one of the most important variables when looking at macroeconomic trends. So we monitor it very closely to see what effect it might have on growth and inflation.
What course do you think inflation will take over the next few months?
We expect inflation to rise temporarily. It may even exceed 2% towards the end of the year, but this will only be because of temporary factors, such as soaring energy prices. On average, it will be 1.5% this year. We expect it to slow in 2022 and to stand at 1.4% in 2023.
As a result of NGEU, do you truly believe that the risk of countries like Germany speeding ahead and leaving the others behind has been averted? Germany has also invested a lot of its own money in the economy and had the fiscal space to do so. If the gaps between countries are too great, will this once again threaten the euro area’s resilience?
Excessive divergences between countries do indeed pose a threat to the euro area’s resilience. But the idea behind the recovery plan is exactly that, to prevent these excessive divergences from occurring. That’s why it was important that NGEU earmark more funds for the hardest hit countries like Italy and Spain. And this is especially true for countries such as Spain, whose economy is highly dependent on the services sector, which has been hit hardest by the pandemic.
Some people fear that the end of the pandemic – and debt moratoria – could trigger an avalanche of bankruptcies. Do you share these concerns?
It’s true that at the beginning of the crisis, one of the biggest concerns was the possibility that the crisis itself might be followed by a wave of bankruptcies, mainly in the tourism sector and services in general. That’s why it was important for some countries, including Italy and Spain, to provide financial support to the hardest hit sectors from the outset and decide to grant debt moratoria. This was also important to prevent the emergence of a vicious circle between sovereigns, banks and corporates. Again, in this situation, it will be crucial that these measures are withdrawn gradually and with a great deal of prudence after the crisis. Otherwise we run the risk of choking the recovery.
Do you think there is a risk of a new wave of non-performing loans and the zombification of part of the banking system?
As you know, there is always a lag between economic developments and changes to levels of non-performing loans. There will most likely be an increase in non-performing loans in the second half of the year, but we don’t expect it to be as acute as we feared at the start of the pandemic. Still, banks need to take timely action to minimise any cliff effects when the moratoria measures begin to expire.
There has been much talk of a digital euro. But following Facebook’s announcement that it would launch its own digital currency, “Diem”, is there a risk that Europe might be too late? Is the currency and the very existence of central banks under threat?
Central banks have played a key role worldwide in dealing with the pandemic and we must make sure we are also well equipped to deal with any future challenge, on all fronts. Our current focus is to deepen the analysis of how a digital euro should work and what it should look like to benefit European citizens and our economy. The Governing Council will decide around mid-2021 whether to initiate a project for the possible launch of a digital euro.