European Parliament plenary debate on the ECB Annual Report for 2016
Introductory statement and closing remarks by Mario Draghi, President of the ECB, Strasbourg, 5 February 2018
Mr President of the European Parliament,
Mr Vice-President of the Commission,
Honourable Members of the European Parliament,
I am very pleased to be here to discuss with you the ECB’s activities and your draft resolution on the ECB’s Annual Report 2016.
Today’s debate represents a good opportunity to take stock of progress made and discuss the way forward.
A decade ago, the global financial crisis was starting. Today, while further efforts are needed to overcome its legacy, the euro area economy is expanding and employment is rising.
Your draft resolution points out that monetary policy has played a key role in this recovery process. The ECB has indeed acted decisively, in line with its mandate. We have addressed financial fragmentation and supported the economy, enabling inflation to gradually converge towards our objective.
The draft resolution also notes that the independence of the ECB has allowed us to take resolute action within our mandate. But independence is just one of the cornerstones of our institutional framework. Accountability is its necessary counterpart. And you, as the representatives of the people of the EU, are the heart of our accountability. Together, independence and accountability underpin our effectiveness and our legitimacy.
In my remarks today, I will focus on two particular issues that have been raised in the draft resolution. First, I will elaborate on economic developments in the euro area and the role of the ECB’s monetary policy. Second, I will discuss the state of the financial sector and the measures needed to further strengthen its resilience.
Economic developments and the role of the ECB’s monetary policy
The euro area economy is expanding robustly, with stronger growth rates than previously expected and significantly above potential. According to preliminary data, euro area real GDP increased by 2.5% in 2017, compared to the 1.7% that had been foreseen in our December 2016 staff projections for the same year.
The economic expansion is broad-based. The dispersion of growth rates across countries and across sectors is at its lowest level for 20 years. Accordingly, we see positive growth in over 85% of the sectors in the euro area economy, compared with an historical average of 74%. Employment growth has recently strengthened as well in all the main sectors, namely in industry, construction and market services. These developments bode well for economic growth, as expansions tend to be stronger and more resilient when growth is broad-based.
The number of people employed in the euro area has also increased by around 7.5 million since hitting a low in mid-2013. Employment has now reached its highest level since the introduction of the euro. The unemployment rate continues to decline and now stands at close to a nine-year low of 8.7%, down by 3.3 percentage points from its highest level.
As more people find jobs, household incomes rise. This has helped to strengthen private consumption growth, which in turn is boosting business investment. In addition, a number of other factors have supported investment. These factors include higher demand for euro area exports, rising corporate profitability and an increasing use of installed productive capacity.
These positive developments have been fostered and reinforced by the pass-through of the ECB’s monetary policy measures, which have eased funding conditions for households and firms. Small and medium-sized enterprises (SMEs) in particular have benefited from our policy measures. The growing inclusiveness of this economic expansion is partly due to the renewed vigour of small businesses, which are a key engine of income creation in our economy.
While our confidence that inflation will converge towards our aim of below, but close to, 2% has strengthened, we cannot yet declare victory on this front.
After increasing to 2% in early 2017 due to a rise in energy prices, headline inflation has fluctuated since May 2017 between 1.3% and 1.5%. Measures of underlying inflation, which exclude the most volatile components, remained subdued and have yet to show convincing signs of a sustained upward trend. Also, new headwinds have arisen from the recent volatility in the exchange rate, whose implications for the medium-term outlook for price stability require close monitoring.
On the back of improved economic conditions, the financial stability situation in the euro area has also continued to evolve positively. As I will explain in more detail, for the time being we have little indication that generalised imbalances are emerging.
Overall, while we can be more confident about the path of inflation, patience and persistence with regard to monetary policy is still warranted for underlying inflation pressures to build up and inflation to converge durably towards our objective. That is why – at our last meeting – we re-affirmed the decisions taken at our October monetary policy meeting last year. Accordingly, our net asset purchase programme, running at a monthly pace of €30 billion, will continue until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. In parallel, we will reinvest the principal payments from maturing securities purchased under the expanded asset purchase programme for an extended period of time after the end of those purchases, and in any case for as long as necessary. We expect our key interest rates to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases.
Looking forward, we remain fully committed to our price stability objective and – in line with our monetary policy strategy – we aim to stabilise inflation around levels that are below, but close to, 2% within a meaningful medium-term horizon. As always, our monetary policy will continue to be guided by our assessment of the progress made towards our objective. Our forward guidance continues to provide a stable framework for our monetary policy stance and its outlook. In line with that guidance, monetary policy will evolve in a fully data-dependent and time-consistent manner.
Strengthening the resilience of the euro area financial sector
Your draft resolution also considers several aspects related to the euro area financial sector and I would like to follow up on some of them.
Let me first of all emphasise that our monetary policy and a healthier financial sector are mutually reinforcing.
By supporting the economic recovery, our monetary policy measures have had a positive impact on the credit quality of banks’ loans to businesses and households, and helped banks to further reduce their provisioning costs. Moreover, a stronger economy generates greater volumes of sustainable bank lending. Both factors have therefore strengthened the solidity of the European banking sector.
A better integrated and sounder financial sector has also been able to transmit our policy impulses more evenly across the euro area. The improved health of the banking sector, coupled with our credit easing measures, has brought about a marked improvement in the transmission process, as shown by the reduced heterogeneity of bank lending rates across countries and improved borrowing conditions for SMEs.
A more robust financial sector has also allowed us to pursue an accommodative policy for as long as necessary, without any build-up of significant financial stability risks.
The draft resolution points in particular to the risks stemming from possible asset bubbles. We are closely monitoring developments in some market segments, such as prime commercial real estate and housing markets in some countries, and corporate bond markets for lower-rated issuers. As we explain in our Financial Stability Review, asset price increases in euro area markets have so far not been accompanied by excessive credit growth. Although credit flows have been recovering, growth rates are still far below anything we saw before the crisis and on the low side of the range of growth rates historically seen during recoveries. So there is no evidence of systemic credit-fuelled bubbles.
The efforts we have made in recent years to strengthen prudential regulation and supervision, above all with the establishment of the banking union, have certainly played a role in protecting financial stability.
In particular, the ECB Banking Supervision plays a key role in ensuring the safety and soundness of banks. It enhances the banks’ resilience through strengthened prudential regulation. It also fosters cross-border financial integration and provides a level playing field by harmonising supervision across the euro area.
Also on the macroprudential side, we see national authorities in close cooperation with the ECB being very active in further mitigating the emergence of possible systemic risks, especially with respect to residential real estate developments.
Despite the improved cyclical environment, improved market sentiment and the substantial strengthening of its shock absorption capacity, the European banking sector continues to face structural challenges, as you also state in your resolution.
Indeed, overcapacity and cost inefficiencies continue to weigh on bank profitability in certain banking markets.
Moreover, the high stock of non-performing loans (NPLs) needs to be further reduced and any future build-up needs to be avoided. NPL levels have been declining for more than three years and good progress has been made on the EU Council Action Plan, although there is still a considerable way to go. Additional efforts by banks, supervisors, regulators and legislators are needed to create an environment in which NPLs can be effectively managed and efficiently disposed of.
Strengthening the resilience of the euro area financial sector also means adapting to a changing operating environment.
The resolution mentions, for instance, the growing role of fintech companies. This means more competition for banks, including in the field of lending and payment services. At the same time, new technology presents an opportunity for banks to increase the value added and the cost-efficiency of their services.
Another factor shaping the euro area financial sector is the United Kingdom’s decision to leave the EU. At this stage, we do not have clarity regarding the shape of the UK’s future relationship with the EU. Well-managed preparations are thus essential for dealing with frictions in the transition from the current situation to the eventual new equilibrium especially in the event that no transitional agreement is reached between the EU and the UK.
Banks and financial institutions are not the only ones that have to prepare for an operating environment in a state of flux. Policymakers too, at national and European level, have to make sure that the regulatory framework is fit and ready to safeguard the resilience of the financial sector in the face of the new challenges.
Let me mention two examples.
First, finalising the banking reform package is crucial. The package will strengthen the regulatory architecture, reduce risks in the banking sector and increase financial stability. It will introduce into Union law new internationally agreed standards, such as the leverage ratio requirement, which will restrict the build-up of excessive leverage in the banking system, and the standard on total loss-absorbing capacity (TLAC), which will strengthen the resolution framework. As co-legislators, you play a vital role in this process. I would encourage you to aim for a consistent implementation of the internationally agreed standards, so as to ensure a level playing field worldwide and to reduce options and national discretions as far as possible.
Second, it is important to complete the architecture of the banking union by putting in place the agreed common backstop to the Single Resolution Fund and by establishing a European deposit insurance scheme (EDIS). These are two fundamental pieces of the banking union project and their implementation should not be postponed further. The backstop should ensure that sufficient funding is available at all times to guarantee orderly resolutions. A fully fledged EDIS is an indispensable counterpart to the single currency as everyone in the euro area should be able to have confidence that the money in their bank account enjoys the same level of protection, regardless of where the account is held within the euro area.
Let me conclude. We pay close attention to the European Parliament’s resolution on our Annual Report. And we will respond in detail to the issues you raise there when we publish our ECB Annual Report for 2017.
The strong relationship between the ECB and the Parliament not only demonstrates the importance of accountability, but it also bears possible lessons for the reflection on the future of EMU whose strengthening should remain a priority.
A well-designed and effective policy framework requires a clear institutional architecture, measurable objectives and the tools to achieve them. And it needs to be accompanied by strong accountability. This is essential not only to ensure that policies are effective. It is also crucial if the public is to understand those policies and play an active role, in particular via their representatives in Parliament.
Thank you for your attention. I am at your disposal for questions.
Mr Vice-President, let me first thank Mr Fernández and his colleagues for the report. It is very encouraging for our work that you stress how our measures have contributed to the recovery and to financial stability.
You noted in the report that the institutional framework enshrined in the Treaties allowed us to take decisive action in line with our price stability mandate, and this has been the objective of our monetary policy throughout. It still is the objective of our monetary policy. In the course of exchanges we are often told that our monetary policy affects one category or another, but our objective is price stability, defined as an inflation rate which is close to, but below, 2% for the whole of the euro area, not necessarily for one specific country. That is how our monetary policy should be judged: whether in the medium term we reach this objective.
I would like to thank Commission Vice‑President Dombrovskis, and all of you, for this very relevant and useful debate. The debate shows that, while we are now seeing the positive results of our policies, we should not be complacent, but should rather strive for continued improvement.
I apologise in advance that, given the short time I have, I cannot comment on each and every statement, but let me touch on some of the issues that you raised.
One issue raised by several honourable Members concerns the effects that our monetary policy has on the distribution of income and wealth. So let me say a few words about the effects of quantitative easing (QE). It is quite clear that QE raises asset prices. The holders of assets are generally wealthy institutions or wealthy people, so in the short run you have a worsening of distribution. At the same time, to the extent that QE is successful, it increases employment – as I have said, and I am going to say it again – and it is by far the most powerful measure for decreasing inequality in any economic system.
From this viewpoint, even though in the short run one has some negative consequences, in the medium and long term the positive consequences outweigh, very consistently and significantly, any short-term negative concerns. This has been shown, by the way, in several studies. The best way to decrease inequality is to increase employment, and that is what we have done, contributing to increasing employment by 7.5 million jobs over three-and-a-half years.
When we look at wage growth – and that is very important for us because it is, in a sense, what tells us whether inflation is moving towards our objective in the medium term – annual growth in terms of compensation per employee increased has gradually from 1.1% in the second quarter of 2016 to 1.7% now. It is still below its historical average, which is 2.1%, so we have to be more patient, but looking at what happens in other jurisdictions – for example the United States which is, by the way, far advanced in the business cycle – we see that wage growth picks up in the end. The recent data in the USA show exactly this.
We have to be aware that we have weak productivity growth, ongoing impacts of labour market reforms implemented in some countries during the crisis and certainly a much bigger labour supply coming from stronger migration flows and higher participation rates. Participation rates of women and older people especially have increased considerably. Also, the low-inflation environment that has prevailed for a long time is now influencing current negotiations. And, by the way, one thing that is quite important in explaining this light response by wages is that even though we had a significant increase in employment, when we go and look at the quality of this increase in employment we see a lot of part-time and temporary arrangements. I am listing all these factors, because they are explanations of why the nominal wage-growth response is going to be lower than we had expected.
But we know by looking at other jurisdictions which had, by and large, the same problems that, in the end, nominal wages are going to go up, and they are going up, albeit at a subdued rate.
As regards the effects of our monetary policy, some speakers questioned the effectiveness of this policy. We have estimated that our measures have made a substantial impact on the economic performance of the euro area. Considering all the measures taken between 2014 (and even before, in 2013) and October 2017, the overall impact on EU area real GDP growth is 1.9%: 1.9 percentage points over three years.
One Member pointed out that investment is still low. We are coming from very, very low levels of private investment but, if anything, over the past three or four quarters, private investment has picked up and it is actually increasing at a much more satisfactory rate than in the past.
Since the end of May 2014, lending rates for households and non-financial firms have declined significantly. There is one thing I said in the introductory statement which is very important: during the crisis we observed widely differing lending rates by banks in different parts of the euro area, but this difference has now shrunk and rates are very close nowadays, as are growth rates, by the way.
One measure we often look at to determine the strength of the growth process and expansion is how different the growth rates are in different parts of the euro area. Well, the degree of difference now is something like we had in 1995‑1996. In other words, it is a historical low. All countries nowadays are growing.
By the way, some Members questioned the effectiveness of our monetary policy for SMEs but, in fact, the lending conditions for SMEs have improved significantly across all sectors and countries. The gradual recovery in loan growth is continuing. The recovery started about four years ago and then really picked up, and it is continuing, though we are not seeing anything like we had before the crisis. So growth rates in lending are good, but nothing euphoric like we saw before the crisis.
One point that was made was that we are focused on buying southern countries’ bonds. That is not true. We do not favour certain countries over others in the implementation of our programme. Our purchases are guided by the ECB’s capital key, which takes into account GDP and population. But if one focuses on purchases at specific points in time, for example on 2017 only, this is bound to yield wrong interpretations. The overall stock of euro system holdings is the relevant metric for any assessment of the programme, and not the recent purchase flows. So, in fact, if you look at the stock, you will see that, as far as German bonds are concerned, we are above the capital key for that country.
By and large, one should consider the design of the programme: it is flexible and the distribution of actual purchases on any given day often deviates from the ECB capital key. But just consider: this was in the original design of the programme when we had countries like Greece, whose bonds we did not purchase. Of course, then, we had to deviate from the capital key.
Some other observations concerned the side effects of our monetary policy. I just wish to reiterate that our measures are proving effective but, at the same time, we are aware of potential side effects and we have to differentiate between the various ways in which they affect economic actors.
For example, for individual savers, an accommodative monetary policy means that they accrue fewer nominal returns on their savings. However, such a policy also supports economic expansion and this bolsters employment, income, returns on investment and tax revenues. It therefore benefits households in their capacity as workers, entrepreneurs, investors, borrowers and taxpayers.
There is no one specific country that has benefited most from our monetary policy. Everybody has benefited. Public sectors in all countries saved billions on interest rate payments; private sectors across countries and sectors saved billions on interest rate payments to banks; and purchasers of houses could have access to mortgages with much lower interest rates than at any time in the past. This has not only boosted the construction industry but has also boosted investment for the purchase of houses.
So we see benefits accruing right across society and not specifically located in one country. When the monetary policy is successful, both creditors and borrowers benefit from it.
Similarly, let me continue now on savers. There are several channels through which our policies affect pension and insurance schemes. Beyond the effect on the liability side, it is important to see what happens on the asset side. Our monetary policy has had a beneficial impact on this side of the equation, as the value of the investment portfolio has increased. But, having said that, I completely agree there is a need to put pension systems on a stable path because the survival of any single country’s pension system cannot be dependent only on the proper configuration of interest rates. It must be actuarially sensible.
I have already addressed, in my introductory remarks, the issue of possible asset bubbles currently being formed in the euro area. For the time being, we have little indication that generalised financial imbalances are emerging. There are no signs of general asset-price misalignments in the euro area but some segments do need close monitoring and one of them is the prime commercial real-estate market, where we actually see stretched valuations. Also, in some large cities and in some countries real-estate prices have increased at a faster pace than household incomes. This certainly requires monitoring.
Finally, yields in the euro area corporate bond markets, especially for some of the lower-rated issues, have started to look exceptionally low by historical standards, but what are we going to do? Are we going to change monetary policy because of these side effects which are not, by the way, systemic? No, the answer is to enact macro-prudential policies which are the best tool for tackling these challenges – also given their country-specific and sector-specific remits. In late 2016, the European Systemic Risk Board (ESRB) issued a set of country-specific warnings on medium-term vulnerability in the EU residential real-estate sector.
Now a word about Brexit. We are not party to these negotiations but we are certainly monitoring their evolution and, clearly, I agree that much depends on these negotiations and possible arrangements. Of course we always prepare for any eventuality and, at the same time, we are assessing the direction, the probability and the potential impact of risk, but the bottom line is that either this transition is well managed and there will not be substantial risks, or it is not, and the risks will be there. We are certainly looking at that and we have to be prepared for that.
Let me also add that, as far as our role as supervisors is concerned, our good cooperation with the Bank of England is important in coping with the potential risks, and especially the risks of any cliff-edge effects. Certainly, transitional arrangements along the lines of the December European Council guidelines could be useful to smooth out the Brexit process but, as we all know, the materialisation of the transition period is still exposed to political uncertainty, and that will remain for some time to come.
On financial supervision, I welcome the review of the European system of financial supervision, including changes to the European supervisory authorities. Some of your comments touched upon the issue of transparency. Here, let me reiterate that we are in complete agreement about the importance of ECB transparency vis-à-vis the European public. We have continuously assessed where we need to further strengthen our transparency framework, and we have demonstrated our commitment, improving our framework as necessary.
Just briefly, let me list a few of the actions we have taken. The accounts of Governing Council discussions are now published four weeks after each monetary policymaking meeting. There was none of that a few years ago. Since 2015, the Executive Board members, as well as the Chair of the Supervisory Board, publish their diaries covering professional meetings with external parties. None of that was in place until a few years ago. And in 2016 we decided to disclose the agreement on net financial assets (ANFA). Last year we also published the text of the emergency liquidity assistance agreement. We have announced transparency in relation to our purchase programme, especially transparency on the corporate sector purchase programme.
Some of you made reference to the European Ombudsman’s recommendations on the interaction of members of the ECB decision-making bodies, including myself, with the Group of 30 (G30). We have certainly taken note of the Ombudsman’s letter and we will respond in time, but let us remember that the European Ombudsman has already concluded that the ECB must conduct dialogue with market participants and that there is no evidence that the G30 meeting could have directly influenced, or have had an adverse impact on, the ECB’s supervisory tasks. The Ombudsman has also confirmed that the ECB has a robust system of safeguards in place to manage its contacts with the financial sector.
Again on transparency, we publish on our website extensive documentation on all these interactions with markets. We disclose agendas and summaries of the discussions, so I can assure you that the ECB is, and remains, committed to reviewing, adjusting and updating our transparency framework.
One or two speakers touched on Bitcoin and other cryptocurrencies. Let me first say that we are not observing a systemically relevant holding of digital currencies by supervised institutions – by banks, in other words. Actually, the credit institutions established in the European Union are showing a limited appetite for digital currencies like Bitcoin, notwithstanding the high level of public interest. However, recent developments, such as the listing of Bitcoin futures contracts by US exchanges, could lead European banks too to hold positions in Bitcoin, and therefore we will certainly look at that.
However, we should understand that Bitcoin and other digital currencies are in the unregulated space and should be regarded as very risky assets. Virtual currencies are subject to high volatility and their prices are entirely speculative. Banks should measure the risk of any holdings of digital currencies in their portfolio accordingly. Right now, digital currencies are not subject to a specific supervisory approach. Work is under way in the Single Supervisory Mechanism to identify potential prudential risks that these digital assets could pose to supervised institutions.
There were some other specific points. We are going to consider the possibility of having a Charlemagne commemorative coin. On monetary financing in Hungary, we will assess the existence of monetary financing in our report. As you know, the ECB is accountable to the European Parliament, but members of its Executive Board, myself included, have accepted invitations to discuss our monetary policy generally and broadly in national parliaments, so I would be glad to accept an invitation from the Irish Parliament if I were to receive it.
I think I have gone through most of your questions. Thank you.
 The difference between interest rates for loans to non-financial corporations of above and below €1 million also continued to decline, indicating easier access to finance for SMEs, in particular in the countries that were most affected by the financial crisis.
 The publication is accessible on the ECB’s website at: https://www.ecb.europa.eu/pub/fsr/html/index.en.html