Interview with Antenna TV
Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Nikos Rogakos
5 April 2022
What are the main challenges that the Russian invasion of Ukraine creates for the euro area economy? How can we deal with them?
Of course the war is a terrible tragedy. It's a watershed for the relations between the European Union and Russia. There's already been many responses in terms of the war: the sanctions, the help for the many millions of refugees. A lot is going on, including at the ECB. There are really three concerns from the point of view of the economy. One, of course, is: we know energy is a big issue – the price of oil, the price of gas and the supply availability. So that's a big concern. A second issue is trade. Europe has traditionally been exporting many goods to Russia, and Russia is also important for tourism in some parts of Europe. But that is now gone with the sanctions. The third element is uncertainty, and this is the issue we are focusing on a lot. We have seen different indicators of investor confidence and of consumer confidence come down because, in a war situation, people are nervous. They don't know what the future will look like. And if you are uncertain, it makes people more reluctant to spend, to consume, to invest. So this is something that we are keeping a close eye on.
Now, please remember that this year, outside of the war, there is the reopening of the European economy after the pandemic. The war is a major negative economic issue, but the reopening of the economy gives some momentum. So this year, for example, we should expect the tourist season to be better than last year.
Incoming inflation readings across the euro area are very high, and the war exacerbates the situation. When do you think that inflation could peak? How soon should we expect it to start de-escalating? What can the ECB do about this? I remind our viewers that the ECB dealt very effectively with the impact of the pandemic on the economy.
As we've just talked about, behind the inflation is this energy shock. The energy shock is of course very large. In March, for Europe, energy prices were 45% - nearly by half -- higher than they were one year ago. That is a major issue for firms, for households, for governments. In the context of a 45% increase in energy costs, right now inflation is more than we would like. We do think that there may be some months to go. Maybe by mid-year we will see the peak. But I think it depends on the war. Most likely, with the nature of the energy shock, prices will either level off at these high prices or will start to decline. But the momentum of inflation will slow down, so we do think that in the second half to the year, as you say, the inflation rate will come down. And we do think it will be a lot lower next year and the year after. It's very dramatic, but it essentially has an element that we do think will slow down and go into negative momentum.
Would you see a risk of stagflation for the euro area?
Let me emphasise: what we see right now is, when you have this energy shock, it's pushing up prices and it does reduce incomes in the economy. So it's a natural question to ask, but please remember: we have momentum in the European economy because of the reopening after the pandemic. We have Next Generation EU providing public investment in many countries. So when you put all of that together, what we think is – yes – a slowdown in the economy, but the economy will still grow this year. So that is very important, and we think that, unlike the 1970s, these are a few months of high inflation rates. It is not a decade of high inflation rates, and we do think the inflation will fall later this year. So please remember: this inflation is coming from outside, it is not coming from the European economy. This is why we do think it has this special characteristic.
Would you argue that we still need a green transition given the high prices of energy?
I think it's clear, maybe more than ever. We know that the dependence of Europe on Russia is because we have not made the transition. We still have too much oil and gas in our energy mix, so we know it cannot happen overnight but we do have to increase the share of renewables: solar panels, wind energy and so on. This is the only answer. Now, of course the plan has to be credible, the plan has to be financed, so it's a big challenge for this decade. It is not overnight, but I think the answer is clear: it is to accelerate the transition.
How do you see the war affecting the Greek economy? How would you describe the general situation of the Greek economy?
Well, I think the war is essentially going to affect all of Europe, including Greece. As we talked about, here firms and families will have to cope with high energy prices. Yes, the Government can and should respond to protect the most vulnerable, but it should be on a targeted basis and temporary. These high prices, the economy will have to adjust. It's correct to offer temporary and targeted help but there is a limit to that. So the energy shock is there. For trade, I think the exposure of Greece is maybe more limited than some other European economies. For uncertainty, there's both the direct effect here and the indirect effect because if investors in other parts of Europe cancel some plans, maybe they will buy fewer imports from Greece. So I think Greece is part of the mainstream in the situation. It's a general European concern; it is not specific to Greece.
I know that this question should be addressed to your colleagues in ECB Banking Supervision, but since we have you here – could you tell us a bit more about the prospects of the Greek banks?
We all recognise that there has been progress, for example in reducing the amount of non-performing loans, but after a major crisis I think there needs to be a lot of persistence. to make sure that these are addressed. Even if they have been sold in many cases and are no longer in the banking system, they do need to be resolved. So the faster all of the mortgages that need to be restructured and other loans find a final resolution, find a final settlement, this will allow the financial system to focus on new lending and supporting the Greek economy. I would say dealing with the legacy remains an issue. Dealing with now what we see now, where firms that have energy exposures, will have to be reviewed by their banks. So I think, as always, if the banking system is going to provide important support for the economy, focusing on good procedures, good financing, remains very important.