Interview with Het Financieele Dagblad
Interview with Luis de Guindos, Vice-President of the ECB, conducted by Joost van Kuppeveld and Daan Ballegeer
17 September 2021
[Introduction by the FD on inflation and its effect on savings]
“I fully understand that many people are complaining about the low interest rates, but you can’t look at purchasing power purely in terms of inflation,” De Guindos says. “You need to look at all of the effects of our policy. If negative rates are necessary for Europeans in order to boost the economy and retain their jobs, then that helps a significant share of society. With such a policy there are always trade-offs. As a Spanish minister of finance once said, what is good for your kidneys is bad for your liver, and what’s bad for your kidneys is good for your liver. You need to seek a balance.”
Moreover, it’s not a sure thing that interest rates will remain low for long, the Spaniard finds. “Structural forces that have been at the root of the low interest rates, such as globalisation, digitalisation and demographic developments, may be evolving. What consequences will the pandemic have over the longer term? I think that globalisation is starting to decline, and that supply chains are no longer as widely dispersed as they once were.”
Within the ECB, de Guindos is neither seen as a dove nor a hawk, meaning that he has no pronounced preference for stimulating economic growth rather than keeping inflation in check. He is known first and foremost as a courageous pragmatist. De Guindos prefers to call himself a technocrat than a politician, as he has never been elected. He is credited for steering Spain’s economic recovery following the great financial crisis, by fostering structural reforms, notably in the labour market and a deep restructuring of the banking sector.
When he took up his position in 2018, hawks feared that, given his background, de Guindos would be too political, too willing also to make monetary concessions. That fear only swelled when, one year later, Mario Draghi ended his term as ECB President, and de Guindos began working under another former minister of finance: Frenchwoman Christine Lagarde.
Is such “politicisation” at the head of the ECB desirable?
“I do not agree with that description. The ECB is an independent institution. But a central bank cannot be an ivory tower; you have to keep in touch with reality and with what people are asking for. We are not almighty and have no philosophers’ stone with which to transform everything we touch into gold. The ECB’s Governing Council is made up of a nicely balanced combination of pure central bankers, academics and seven former ministers of finance, myself included. That makes for great discussions.”
These discussions brought forth the strategy review, which was completed this year and involved a reassessment of the underlying principles and targets of monetary policy. “A great achievement”, in de Guindos' view. The central bankers unanimously chose a new definition of price stability. Inflation no longer has to be “below, but close to, 2%” but rather amount to 2% over the medium term. The target is symmetric, in the sense that negative and positive deviations of inflation from the target are equally undesirable. And two percent should not be interpreted as a ceiling.
The central bankers also stressed that some policy instruments, which were unconventional at the start of the euro in 1999, or simply did not exist, are now absolutely normal. Just think of negative interest rates, the issuance of longer-term loans and asset purchase programmes. “They are at our disposal and we will continue to make use of them”, de Guindos said, emphasising that the ECB will also take financial stability considerations into account in its monetary policy deliberations.
What consequences are you referring to specifically?
“Potential vulnerabilities in the financial landscape, such as stock market developments, debt levels of firms and households and the path of house prices may give rise to financial stability risks. We have a framework to formally include such issues in our decision-making.”
You haven’t mentioned sovereign debt levels although these have soared over the past few years. Isn’t the ECB itself in danger of being held hostage by governments through its extensive portfolio of sovereign debt?
“The pandemic was an exceptional event. Expansionary fiscal and monetary policies were crucial in order to tackle the consequences of the pandemic, and the policy mix helped to prevent a far more severe crisis. But monetary policy has remained independent throughout.”
“It must be crystal clear that our primary and ultimate aim is price stability, and so our focus is on the path of inflation. Our decisions must be felt throughout the entire euro area, and therefore we have to prevent market fragmentation.”
“I’d also like to point out that the fear of ‘fiscal dominance’ remains limited because a lot of new government debt keeps coming to the market. According to our estimates, in the short and medium term we will not reach the limits that we have set for ourselves. They are there precisely to ensure that we have a market economy, with private parties playing the most important role in the bond markets.”
Both the government debt and the budget deficits of many euro area countries are way over the limits in the Stability and Growth Pact.
“Even before the outbreak of the pandemic there was discussion about the Pact, because there were problems with the limits (60% of GDP for government debt, and 3% for the budget deficit, ed.) and procyclicality. But the Stability and Growth Pact demonstrated its flexibility, we were able to tackle the pandemic, that’s pretty clear.”
You are praising the flexibility of the Pact, but it was simply deactivated.
“The Pact includes an escape clause under which the 3% limit is suspended and countries are allowed to increase their deficits. So the rules were adhered to.”
“That’s not to say that the Pact can’t be improved, and so made easier to explain to the public. The European Commission is going to launch a public consultation on this and I think that those discussions will be very interesting. Personally I think that the two main elements of a future SGP should be a simple and clear expenditure rule and the evolution of the public debt ratio.”
“The pandemic has widened the disparities between countries with a low deficit and low debt and countries with a high deficit and high debt. The latter will have to make an extra effort once the pandemic is over.”
Inflation in the euro area has now been above target for months. The ECB says that this is temporary and it will fall back to below 2%, but not everyone is convinced. A fake €1,000 banknote featuring Christine Lagarde is doing the rounds on social media. Made in Germany.
“We expect inflation to continue accelerating until November this year and then fall to 1.7% in 2022 and 1.5% the year after. There are good reasons for the current, higher level, such as the slump in economic activity last year due to the pandemic and thus in the level we’re now comparing prices with. Furthermore there was a temporary reduction in VAT in Germany in the second half of last year, that kind of thing.”
“Inflation this year may turn out even higher than we now think if the supply problems persist. That has consequences not just for the prices of microchips and semiconductors, but also for energy and transport prices, for instance. Also, so far we have seen few wage rises on the back of the higher prices. That may change in the autumn, when many wage negotiations get under way and we will be vigilant on these possible developments.”
Since the euro crisis there has been a clear split in public opinion between the “core countries” and the “periphery” of the euro area. Do you also see such a division, and can it be reversed?
“Ten years ago – a period of rescue plans – the differences were much bigger and more relevant than today. That's thanks to the efforts of a number of southern European countries, which paid off in growth, thereby enhancing the internal cohesion within the euro area. Take Spain for example. Major efforts were undertaken there to boost competitiveness, reduce the government deficit, and improve the balance of payments.”
Officially EU Member States have to introduce the euro once they fulfil certain conditions. What does it say about support for the euro if large countries like Poland refuse to do so?
“According to the Treaty on the Functioning of the European Union the euro is the currency of Europe, and people in the euro area are very satisfied with it. Two countries have asked to join, Croatia and Bulgaria, and they are now fully engaged in that process. Their desire to participate in this project is to be welcomed, both from a political and an economic perspective.”