Interview with El País
Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Lluís Pellícer on 3 November 2021
8 November 2021
The ECB revised its projections for the euro area economy upwards in September. But the official data show that growth in countries like Spain and Germany is lower than expected. Is the recovery at risk?
Each euro area country has its own economic profile, and although the pandemic was a common shock it has hit countries in different ways. Those countries with a large tourism sector, such as Spain, were particularly affected. But this in itself is not a threat to the recovery. It is just a question of time, and any dips that happen now will be balanced out by improvements later on. We don’t think the recovery process is over; we actually think that growth will be pretty strong in 2022. The countries that are lagging slightly behind have a lot of available capacity. Spain’s productivity has not been harmed by the pandemic, so it’s a matter of reviving activity. Part of this relates to demand: the tourist season will be better next year. And the other part concerns bottlenecks, which ultimately will be resolved. There are other factors that make us confident that we will recover quite well over the next year or so, such as the savings that people have accumulated during the pandemic, the Next Generation EU fund, particularly for a large recipient like Spain, and the high vaccination rates.
But there have been a number of setbacks for the European economy in recent weeks, including supply problems, bottlenecks, higher energy prices, price increases and the threat of new variants. At what stage of the recovery does all of this disappear?
The global recovery this year has been quicker than expected. In that context, of course bottlenecks can occur because supply is not keeping up, but that will be largely fixed next year. The fast recovery has also meant that energy demand has exceeded forecasts. Now the situation may last longer than we would like, but these headaches are not going to wipe out the underlying momentum of the recovery. And it is not only about getting back to where we were before the pandemic – it’s also about catching up to the growth that we should have had in 2020 and 2021. So there is still a lot of momentum in the system.
Europe is close to returning to its pre-pandemic level of GDP, but this is not going to be the case for Spain. Is there a risk of the gap between north and south getting bigger again?
Some countries may be recovering somewhat more slowly, but they will recover; the disruption is a very temporary one that is linked to the tourism industry. And the Next Generation EU fund has been designed to ensure that all parts of the EU not only recover, but also have strong medium-term prospects. In the coming years, the high public and private investment connected to this plan will support countries such as Spain and Italy in particular. The situation now is completely different from 12 years ago during the global financial crisis. We may be moving at different speeds, but Europe will recover quite well over the next year or so.
The ECB President, Christine Lagarde, said that inflation took centre stage at the October Governing Council meeting. She was very clear: “inflation, inflation, inflation”. How long do you think price increases will continue?
Inflation is unexpectedly high at the moment, but we do think it is going to fall next year. And if we look at the situation over the medium term, the inflation rate is still too low, below our 2 per cent target, not too high. The currently high inflation is linked to the fact that the recovery has been strong at the global level. We have these bottlenecks and high energy costs, which together are the main factor behind the price increases. I know that in Spain energy costs have also risen significantly. We think that next year the bottlenecks will ease and energy prices will drop or stabilise. There are also other factors, such as the recovery of some prices that had fallen in 2020. So yes, we did talk about “inflation, inflation, inflation”, but this period of inflation is very unusual and temporary, and not a sign of a chronic situation. The situation we are in now is very different from the 1970s and 1980s.
Faced with the rising cost of living, some German unions are demanding wage increases of at least 4 per cent. Are you worried that these negotiations might continue feeding inflation?
There is a collective interest in closely observing what is going on, but we have to take a nuanced view. In recent decades we have seen that wage increases at the euro area level have not been high enough to generate inflation of 2 per cent. That said, such negotiations should also be shaped by wider considerations, such as productivity and the competitiveness of a country, sector or firm. It is important that wage negotiations consider the increased cost of living but also avoid unsustainable increases in labour costs. Finding this balance is key. We will look out for unsustainable patterns that might lead to pressures that are undesirable from an inflation perspective. But let me emphasise: we don’t see this right now. It’s more of a risk factor that we need to take a look at, rather than something where we see any evidence building.
Inflation concerns are spreading in Germany, where strong criticism of the ECB has already emerged. Could this climate accelerate the withdrawal of the emergency asset purchase programme?
Our monetary policy decisions are not driven by any form of external pressure. The EU Treaties grant the ECB independence to do its job, which is to achieve 2 per cent inflation over the medium term, so inflation that is neither too high nor too low. Key to our decision-making is our assessment of medium-term inflation, so inflation over a multi-year horizon. With our medium-term perspective on inflation, we’re highly focused on where the trend of inflation may go in 2023, in 2024 and so on, rather than on the near-term dynamic. In terms of our policy, we’re not focused on any particular individual component, because of course, our monetary policy runs across different categories, not just the pandemic emergency purchase programme (PEPP), but also the regular asset purchase programme (APP). We also have the level of interest rates, and we have our targeted lending programme, the TLTROs. So we have many dimensions that work together with our monetary policy, but our monetary policy will be decided on the basis of what is needed to make sure that inflation stabilises at 2 per cent over the medium term. The short-term volatility is something that we have to look through. At the same time, we also have a responsibility to explain that there are powerful reasons to believe inflation will fall next year, and that we have to be sufficiently patient so as not to overreact to a temporary increase in inflation.
The ECB President maintains that you are not in the tapering phase [of stimulus being withdrawn], but the markets seem to believe that you are, given the increase in risk premia…
I do not want to dwell on day-by-day market fluctuations, because these have moved in both directions over the last week. For me, tapering would suggest putting an end to the asset purchases or quantitative easing. This is being discussed in the United States and the United Kingdom, but not in the euro area. What has been discussed is the recalibration of the asset purchases: at the beginning of the year, when there was pressure on interest rates, we did more, and now in autumn we are doing less. The scale of the purchases will feature in our decision-making, but we think the euro area is nowhere near a situation where we bring asset purchases to an end. The situation is completely different to that of some other countries.
What is the reason for that difference?
Since the global financial crisis inflation in Europe has been well below the 2 per cent target. The United States and the United Kingdom, however, are facing a greater risk of inflation rising above that level over the medium term. And we are not at the same stage in the economic cycle either.
Does the reaction from the markets support maintaining purchases so as to prevent an increase in financing costs?
We are driven by the inflation outlook. We do care very much about financing conditions, but we assess these over a longer horizon than in any given week. That there has been volatility in the last week or two is not a determining factor. We would look at the basic underlying trends. We have many tools to influence financing conditions, and I think during the pandemic over the past year and a half we have greatly contributed to the recovery by ensuring that financing conditions are favourable.
And does Jens Weidmann’s departure or the arrival of a new government in Germany make it easier to continue purchases?
All the members of the Governing Council, all the national central bank governors, are there as Europeans. They are not there to represent any one country. And they all take a European perspective in the discussions about monetary policy. Jens is a very good monetary economist and has made a very significant contribution to that debate. It is natural that sometimes there are differences in views across Governing Council members. But it is important to emphasise that, by and large, we make decisions by consensus, and quite often by unanimity. Also remember that this summer we reviewed and unanimously approved our monetary policy strategy.
Spain is still lagging behind other euro area member countries in the recovery. Is there a risk of that recalibration or the new steps that might be taken in December affecting its ability to obtain funding in the markets?
Let me stress that all countries, no matter where they are now, are set for a very good recovery. Some may be a few months later than others, but I don’t think there should be concerns about new permanent differentials emerging. I would say that we set monetary policy for the euro area, it is not tailored to specific countries. Some countries might complain it’s a little bit too easy, if an economy is already at full capacity. For other countries operating below capacity, they may sometimes feel that the policy is a bit too tight. We have to be in the middle. But there should be no doubt that we will make sure that Europe has a strong recovery, and that this recovery doesn’t get derailed as a result of an unnecessary tightening of financing costs.