Mario Draghi, President of the ECB,
Frankfurt am Main, 6 March 2014
Ladies and gentlemen, the Vice-President and I are very pleased to
welcome you to our press conference. We will now report on the outcome of
today’s meeting of the Governing Council.
Based on our regular economic and monetary analyses, we decided to
keep the key ECB interest rates unchanged. Incoming
information confirms that the moderate recovery of the euro area economy is
proceeding in line with our previous assessment. At the same time, the latest
ECB staff macroeconomic projections, now covering the period up to the end of
2016, support earlier expectations of a prolonged period of low inflation, to
be followed by a gradual upward movement in HICP inflation rates towards levels
closer to 2%. In keeping with this picture, monetary and credit dynamics remain
subdued. Inflation expectations for the euro area over the medium to long term
continue to be firmly anchored in line with our aim of maintaining inflation
rates below, but close to, 2%.
Regarding the medium-term outlook for prices and growth, the
information and analysis now available fully confirm our decision to maintain
an accommodative monetary policy stance for as long as necessary. This will
assist the gradual economic recovery in the euro area. We firmly reiterate our
forward guidance. We continue to expect the key ECB interest rates to remain at
present or lower levels for an extended period of time. This expectation is
based on an overall subdued outlook for inflation extending into the medium
term, given the broad-based weakness of the economy, the high degree of
unutilised capacity and subdued money and credit creation.
We are monitoring developments on money markets closely and are
ready to consider all instruments available to us. Overall, we remain firmly
determined to maintain the high degree of monetary accommodation and to take
further decisive action if required.
Let me now explain our assessment in greater detail, starting with
the economic analysis. Real GDP in the euro area rose by 0.3%,
quarter on quarter, in the last quarter of 2013, thereby increasing for three
consecutive quarters. Developments in survey-based confidence indicators up to
February are consistent with continued moderate growth also in the first
quarter of this year. Looking ahead, the ongoing recovery is expected to
proceed, albeit at a slow pace. In particular, some further improvement in
domestic demand should materialise, supported by the accommodative monetary
policy stance, improving financing conditions and the progress made in fiscal
consolidation and structural reform. In addition, real incomes are supported by
lower energy prices. Economic activity is also expected to benefit from a
gradual strengthening of demand for euro area exports. At the same time, although
unemployment in the euro area is stabilising, it remains high, and the
necessary balance sheet adjustments in the public and private sectors will
continue to weigh on the pace of the economic recovery.
This assessment is also broadly reflected in the March 2014 ECB
staff macroeconomic projections for the euro area, which foresee annual real
GDP increasing by 1.2% in 2014, 1.5% in 2015 and 1.8% in 2016. Compared with
the December 2013 Eurosystem staff macroeconomic projections, the projection
for real GDP growth for 2014 has been revised slightly upwards.
The risks surrounding the economic outlook for the euro area
continue to be on the downside. Developments in global financial markets and in
emerging market economies, as well as geopolitical risks, may have the
potential to affect economic conditions negatively. Other downside risks
include weaker than expected domestic demand and export growth and insufficient
implementation of structural reforms in euro area countries.
According to Eurostat’s flash estimate, euro area annual HICP
inflation was 0.8% in February 2014, unchanged from the (upwardly revised)
outcome for January. While energy prices fell more strongly in February than in
the previous month, increases in industrial goods and services prices were
higher than in January. On the basis of current information and prevailing
futures prices for energy, annual HICP inflation rates are expected to remain
at around current levels in the coming months. Thereafter, inflation rates
should gradually increase and reach levels closer to 2%, in line with inflation
expectations for the euro area over the medium to long term.
This assessment is also broadly reflected in the March 2014 ECB
staff macroeconomic projections for the euro area, which foresee annual HICP
inflation at 1.0% in 2014, 1.3% in 2015 and 1.5% in 2016. In the last quarter
of 2016, annual HICP inflation is projected to be 1.7%. In comparison with the
December 2013 Eurosystem staff macroeconomic projections, the projection for
inflation for 2014 has been revised slightly downwards. In view of the first
publication of a three-year projection horizon in the March 2014 ECB staff
macroeconomic projections, it should be stressed that the projections are
conditional on a number of technical assumptions, including unchanged exchange
rates and declining oil prices, and that the uncertainty surrounding the
projections increases with the length of the projection horizon.
Regarding the Governing Council’s risk assessment, both upside and
downside risks to the outlook for price developments are seen as limited and
are considered to be broadly balanced over the medium term.
Turning to the monetary analysis, data for January
2014 confirm the assessment of subdued underlying growth in broad money (M3)
and credit. Annual growth in M3 increased to 1.2% in January, from 1.0% in
December. The monthly inflow to M3 in January was substantial, compensating for
the strong outflow in December. The increase in M3 growth reflected a stronger
annual growth rate of M1, which rose to 6.2% from 5.7% in December. As in
previous months, the main factor supporting annual M3 growth was an increase in
the MFI net external asset position, which continued to reflect the increased
interest of international investors in euro area assets. The annual rate of
change of loans to the private sector continued to contract. The annual rate of
change of loans to non-financial corporations (adjusted for loan sales and
securitisation) was -2.9% in January, unchanged from December. Weak loan
dynamics for non-financial corporations continue to reflect their lagged
relationship with the business cycle, credit risk and the ongoing adjustment of
financial and non-financial sector balance sheets. The annual growth rate of
loans to households (adjusted for loan sales and securitisation) stood at 0.2%
in January 2014, broadly unchanged since the beginning of 2013.
Since the summer of 2012 substantial progress has been made in
improving the funding situation of banks. In order to ensure an adequate
transmission of monetary policy to the financing conditions in euro area
countries, it is essential that the fragmentation of euro area credit markets
declines further and that the resilience of banks is strengthened where needed.
This is the objective of the ongoing comprehensive assessment by the ECB, while
a timely implementation of additional steps to establish a banking union will
further help to restore confidence in the financial system.
To sum up, the economic analysis confirms our expectation of a
prolonged period of low inflation, to be followed by a gradual upward movement
towards levels of inflation closer to 2%. A cross-check with
the signals from the monetary analysis confirms the picture of subdued
underlying price pressures in the euro area over the medium term.
As regards fiscal policies, the ECB staff
macroeconomic projections indicate continued progress in reducing fiscal
imbalances in the euro area. The aggregate euro area general government deficit
is expected to have declined to 3.2% of GDP in 2013 and is projected to be
reduced further to 2.7% of GDP this year. General government debt is projected
to peak at 93.5% of GDP in 2014, before declining slightly in 2015. Looking
ahead, euro area countries should not unravel past consolidation efforts and should
put high government debt ratios on a downward trajectory over the medium term.
Fiscal strategies should be in line with the Stability and Growth Pact and
should ensure a growth-friendly composition of consolidation which combines
improving the quality and efficiency of public services with minimising
distortionary effects of taxation. National authorities should also continue
with the decisive implementation of structural reforms in all
euro area countries. These reforms should aim, in particular, to make it easier
to do business and to boost employment, thus enhancing the euro area’s growth
potential and reducing unemployment in the euro area countries. To this end,
the Governing Council welcomes the European Commission’s communication of
yesterday on the prevention and correction of macroeconomic imbalances and on
the Excessive Deficit Procedure. Looking ahead, it is key that the
macroeconomic surveillance framework in the euro area, which was significantly
strengthened in the wake of the sovereign debt crisis, is implemented fully and
in a consistent manner.
We are now at your disposal for questions.
* * *
Question: You placed a lot of emphasis on this
meeting. You said you’d have the information that you needed on a variety of
factors affecting your reaction function today, and you’ve done nothing. You’ve
said that you stand ready to take decisive action if needed, but presumably all
central banks are willing to take decisive action if needed. Isn’t it
reasonable, given that you’ve done nothing today, for investors and the public
to assume that you’re just done, barring some big outside shock? And my second
question is on the euro. You mentioned that your inflation forecast assumes an
unchanged euro. To what extent is the strength of the euro affecting your
inflation outlook, and are you surprised at its strength given the comparative
weakness of the Eurozone recovery and the fact that you’ve got this easing bias
and you’ve got this forward guidance?
Draghi: The reasons for today’s Governing Council decisions are the
following. First of all, we saw our baseline scenario by and large confirmed.
There is a continuation of a modest recovery. In the last quarter of last year
we had an increase in GDP of 0.3%, after two consecutive quarters of positive
growth. The news that has come out since the last monetary policy meeting is
also, I would say, by and large on the positive side. Just let me give you a
few data, not all of them. The composite PMI data that have just come out are
the strongest in two and a half years. The PMI for services also was quite
good. That’s quite important because job creation takes place mostly in the
services sector.
When we look at consumer confidence, we see that the gap between
Germany and the stressed countries, especially Spain and Italy, is actually
narrowing. And so is the data on economic sentiment produced by the European
Commission. It is true unemployment is still high, but it’s stabilised. It’s
now been a few months since unemployment stopped going up. We actually have
some data – local data, like the fall of 2 percentage points in unemployment in
Portugal – which are quite striking. We also saw that the employment data are
timidly going up.
Having said that, the risks are on the downside. But basically,
when we looked at all the amount of information we had in front of us since the
last monetary policy meeting, we thought that our monetary policy stance would
remain accommodative. Our forward guidance is confirmed in saying that interest
rates will stay at the present or lower level for an extended period of time.
And we asked ourselves whether the contingencies I hinted at last time that
would actually elicit monetary policy decisions, had taken place. You may
remember one of these contingencies was an unwanted tightening of monetary
policy on the short-term end of the market. In fact, if anything, we had a
further normalisation of conditions on that front. The other was a consistent
and significant worsening of the medium-term outlook for price stability – for
our inflation outlook – and that, too, isn’t there. So, all in all, I think
that, based on the current set of data, the Governing Council decided not to
act today.
Now, on the second question, let me start first with the standard
statement. The exchange rate is not a policy target for us. But the exchange
rate is very important for growth and price stability. If we look back to the
trough in the exchange rate in 2012 and then we look at the exchange rate today
and we ask ourselves how much this has counted for the low inflation that we
see today, we come up with a figure which is roughly 0.4 percentage points. I
think I will come back to this if I have questions on inflation, but that’s a
significant statement on how the exchange rate might influence our price
stability objective.
Question: I usually cover the Bank of Japan. I
have two questions: First, there were market expectations that the ECB might
decide today to stop sterilising the Securities Markets Programme (SMP). Is
there any reason why this was not decided today? Second, I have been covering
the Bank of Japan for 15 years and so I saw Japan slipping into deflation,
staying there and suffering from it. I know it is not good to draw a direct
link between Japan and the euro area, which is very different for the reasons
you set out at your press conference last month, but what are the key lessons
you think the euro area could learn from Japan’s experience? I am asking
because you say that long-term inflation expectations are well anchored.
However, inflation expectations are very hard to measure, and even in Japan,
long-term inflation expectations have been very stable, even when the country
was suffering from deflation. Furthermore, the Bank of Japan introduced zero
interest rates and flooded markets with liquidity to beat deflation, but this
did not really push up prices. Therefore, I am wondering why cutting rates or
introducing any stimulus measures in the euro area would prevent it from
slipping into deflation. I would just like to know how the transmission
mechanism is different from that in Japan.
Draghi: In answer to your first question, the suspension of the
sterilisation of the SMP is one of the instruments on our list. However, we
have not seen any developments in the money markets that would lead to an
unwanted tightening of the monetary conditions that would justify the use of
this instrument. Furthermore, the benefits of sterilisation are relatively
limited, given, for example, the short maturity of the bonds currently in the
SMP portfolio. The net injection of the liquidity may really only last for a
relatively short time, less than a year. Nevertheless, we will continue to
monitor the situation and look at this, as well as other instruments, in our
catalogue.
With regard to comparisons with Japan, I have discussed this
before. The situation in the euro area is different because inflation
expectations are firmly anchored, whereas they were not in Japan. They
de-anchored at some point. You are right, medium to long-term inflation
expectations are hard to measure, but this is the measure that the ECB used
when inflation was high and is using now that it is low. On both occasions,
there have been discussions about the validity of these expectations. They
could de-anchor themselves both upwards and downwards, but by and large, they
have helped us to deliver, since the establishment of the ECB, our objective of
an inflation rate that is below, but close to, 2%. Therefore, the definition of
these inflation expectations that we have been using has contributed to our
credibility in delivering the inflation target. There are also other reasons
why the situation in the euro area is different to that in Japan. First, we
have taken early decisive action on the monetary policy front for several years
now and are, in fact, still doing so. It has been for several years now that we
have continued to take action. You come here every time expecting us to take action
and are slightly disappointed when we don’t. However, we are anything but
inactive. Second, the condition of the balance sheets of both companies and
banks in the euro area today is not what it was in Japan at the end of the
1990s and in the early 2000s. We also monitor other statistical measures, for
example, the percentage of commodities or services, of which the prices are
falling, i.e. of which price inflation is negative or less than 1%. And the
percentages that we are watching are much lower than they were in Japan when
the country was suffering from deflation. All in all, we believe that the
situation in the euro area is different and that there are other reasons that
explain our low level of inflation. I hinted before that global factors are at
play, for example low energy prices. The average historical contribution to
inflation from energy prices is 0.5 percentage points. More specifically, in
early 2012 this contribution was 1 percentage point, while in February 2014, it
was -0.3 percentage point. This means that of the 1.9 percentage point fall in
annual HICP inflation since the first quarter of 2012, two-thirds can be
attributed to lower energy prices. I also mentioned the exchange rate as having
an effect. In the case of Japan global factors played much less of a role.
There is also another dimension, namely that part of this low inflation is due
to relative price adjustments in the stressed countries, which, prior to the
crisis, were experiencing serious imbalances that needed to be corrected.
Question: Mr Draghi, earlier you spelled out
quite clearly the arguments why you decided not to cut interest rates today. I
am wondering whether all your colleagues subscribe to these arguments, or
whether you had some Governing Council members push for an interest rate cut
today, and – if so – how close the decision might have been. My second question
is on credit developments in the euro area: during the last press conference,
you expressed hopes that, in the coming weeks, we might actually see positive signals
from credit. In light of that, I wonder whether you might have been somewhat
disappointed by what we saw on the M3 data and what you might be expecting in
the weeks ahead.
Draghi: On the first question. Yes, indeed, we had a broad
discussion on changes in interest rates, as well as on other monetary policy
instruments. If I have to flag a key point of the discussion, I would point to
the attention that the presence of slack in the economy received during the
discussion. With slack, we mean a low capacity utilisation rate, an output gap,
which is indeed hard to measure. But according to any measure you want to take,
it is fairly wide and is estimated, at the present juncture, to be closing
itself very slowly. So, our monetary policy stance that says basically what I
have said before, namely that interest rates will stay at the present level, or
lower, will remain as it is even though we will be seeing improvements in the
economy precisely because of the existing slack in the economy. I think this
was really the point of major consensus, if not unanimity, in the discussion we
had. Our monetary policy stance will stay in place even after we see
improvements in the economy, in the flow of data in the economy, because we
have a stock of slack that is weighing on the economy.
On the second point: well, you know it is always a matter of how
you see the glass – you asked me if I was disappointed by the credit
developments: this is like the glass that could be seen as half empty or half
full. We have seen a stabilisation of credit flows and we have seen an increase
in M3. By the way, in December, M1 was low because of special seasonal factors.
I have also explained several times how we should look at
fragmentation. We continue to see some improvement on that front as well. In
particular, even though lending rates remain higher in the stressed countries
than in core countries, and higher for small and medium-sized enterprises
(SMEs) than for corporates, we saw some convergence in lending rates, some
timid, I would say, mild convergence. We also saw another factor, namely that
issuance of corporate bonds completely offset the decline in bank credit, which
is – to some extent – positive news, but we should not make too much out of
that for two reasons. One is that we know only too well that SMEs do not
usually access capital markets, cannot issue bonds on capital markets – if you
exclude those “mini-bonds” that I hear are being issued in Italy but it is
still a very experimental project – and the second is that much of this
corporate bond issuance is concentrated in core countries, in France. It is not
concentrated in stressed countries, basically.
Question: You’ve mentioned geo-political
factors. To what extent were they important in your decision today? How much
did these geo-political factors, such as Ukraine, impact your decision today?
And I would also like to ask you about the developments in emerging markets.
You have commented on that before, but the situation seems to be one of
prolonged unease there. The other question is about credit again: recovery can
hardly happen without credit. In the past you have alluded to several possible
measures, like revitalising ABS, or targeted or conditional liquidity
provisions. Are they still on the table? You have been talking about this for
quite a long time now. Are they still on the table or have you shelved them?
Draghi: On the first question: as you have seen, the impact of the
situation of emerging market economies upon the euro area has so far been
muted. In fact, if anything, there have been flows into the euro area, which
have narrowed the spreads of some of the stressed countries. It is more and
more clear that the situation of the emerging countries depends, to a great
extent, on the economic policies that have not been undertaken, or that have
been undertaken in a wrong way, in the most vulnerable of these emerging market
economies. And, as I think I said last time, we certainly cannot ignore this
fact. We certainly cannot ignore that our monetary policy decisions have
spillovers, and so better communication is certainly there and we ought to
pursue that. But it is also true that the best insurance against foreign
spillovers is good economic policies. And third, international financial
institutions like the IMF should, and could, create safety nets that could help
some of these countries to cope with these spillovers. So there are three sets
of actors: domestic governments and the IMF are the major actors, because
central banks act within their national mandates and have to act in full
independence.
When we look at the specific situation in Ukraine, and if we look
at it from a purely technocratic viewpoint, and we look at the amount of trade
in goods, services and financial services and capital flows, we have to say
that the interconnections are not as important as to suggest a strong contagion
from that region. However, let me also add that this would be a limited way to
look at the situation, because the geopolitical risks in the area could quickly
become substantial and generate developments that are unforeseeable and,
potentially, of great consequence.
On the credit recovery, you are absolutely right: we have hinted
on several occasions at various measures. One was the revitalisation of the ABS
market, and another one was funding for lending. And a third could be QE. We
have not shelved these projects: we are continuing to reflect on this and we
will continue to work. I think time is necessary, because they are not easy
issues. If we consider just the revitalisation of the ABS market, there are
many things that need to change in regulation and in legislation. Today, the
capital charges for ABS discriminate ABS unfavourably with respect to other
instruments with similar degrees of riskiness. The current capital regulation
of ABS was calibrated on a reality which is not the European one. To give you
an idea, I can’t remember exactly the period of reference, but let’s say over
five or ten years, the default rate of ABS in the United States was 17.4%; in
Europe, it was 1.4%. So you see that the capital charges are certainly not
being calibrated on European ABS, which are traditionally of a much simpler,
transparent and unstructured form. These things have to be changed, and it will
be up to the Basel Committee and the European Commission, as far as legislation
within the EU is concerned, to change some of these regulations. Also there are
issues like the sovereign cap: ABS are rated according to their sovereign –
perhaps with a few points difference, but this often does not make much sense.
So there are several issues and, in the end, it may well be the case that, to
launch this market, one may need third party guarantees. So, it is a complex
thing on which the ECB’s staff is working.
Question: I want to come back to two particular
questions. First, coming back to the foreign exchange argument, it is not your
mandate and you have made that absolutely clear, but you have gone to the
extent of working out the impact of the 2012 trough in the euro on inflation,
and inflation is your mandate. Should we, therefore, in some way be viewing the
exchange rate as part of the reaction function? I want to know exactly how we
should be looking at the exchange rate. Second, let me ask a broader question
on the Ukraine, which may be a little offbeat, but the governor of Narodowy
Bank Polski has been suggesting that Poland should rethink whether it should be
a part of the euro area or not. All of this is in the long term, but given the
instability we are seeing at the moment around the Ukraine, does that
strengthen the case for the euro? Is it an advantage?
Draghi: In answer to the first question, I can only reiterate that
the exchange rate is not a policy target, but certainly I have here another
number. The cumulative appreciation of the exchange rate between the euro and
the dollar since the trough of 2012 has been around 9%. In effective terms the
euro has strengthened by 8% since then. Now, as a rule of thumb, each 10%
permanent effective exchange rate appreciation lowers inflation by around 40 to
50 basis points. So we can say that between 2012 and today about 0.4 or 0.5
percentage points of inflation was taken out of current inflation because of
the exchange rate appreciation. Having said that, we have to be cautious,
because there was a previous depreciation of the euro. That is why it is hard
to take the exchange rate as a policy target and even harder to take it as a
policy instrument. But it is certainly a factor that is affecting in a
significant way – together with the price of energy and of food for that matter
– our low rate of inflation.
Your second question is indeed a very difficult one. The euro is
an island of stability. It will also have to go back to being an island of
prosperity and job creation, but certainly it is an area of stability. To the
extent that countries feel threatened, this area certainly looks attractive.
However, I should stop here, because you are aware that the foreign policy and
geopolitical dimensions of these choices go well beyond the mind of a humble
central banker.
Question: Mr Draghi, in the statement you
underscored a high degree of unutilised capacity; this is the first time I have
seen this. Is this a signal that it is a primary concern of the ECB that
unutilised capacity has reached this level in the euro area? And if it is not a
signal, then companies will invest in new capacities. And if they do not
invest, then they will not require credit: so no credit, no creation of money
and then no inflation. Do you follow my line of thinking? My second question is
why do you mention specifically the fourth quarter of 2016 as regards
inflation? You gave a rate of 1.7%, which is above the 1.5% forecasted for
2016. Is this just to say, “hey guys, 1.7%, we are right on the finish line:
below, but close to, 2% – goal achieved”? And maybe could you tell us if there
are some extreme values in these forecasts for inflation and GDP. I mean values
which are below 1.5% or above 1.8%.
Draghi: On your first question, to say that the monetary policy
stance that keeps interest rates at the present or lower level will stay in
place even after improvements are seen in the economy means the following. It
means that monetary policy, even if we do not do anything in the presence of an
improvement in the economy, will become more and more accommodative because
real interest rates will go down. That is the message that this consensus
produces. And in this sense it links with what you said before. One of the
reasons, perhaps the most important reason, for credit flows being low is the lack
of demand. And a lack of demand also means a lack of investment. So, the
present monetary policy stance, which is producing lower real rates, should
help in this sense to increase demand for investment and therefore demand for
credit.
As regards the 1.7%, this is simply stating that there is a
dynamic, which for the first time the ECB’s staff can measure quantitatively,
whereby even though inflation is currently low, it will gradually move towards
a level which is closer to 2%. The data include both the yearly average and
figures for the last quarter to show the momentum towards 2%. But bear in mind,
as I said in the introductory statement, the uncertainty of these projections
increases with the length of the horizon. And the assumptions, such as the decline
in oil prices and unchanged exchange rates and many other assumptions, become
more and more fragile as the horizon lengthens. So, a certain degree of wisdom
should be employed when viewing these projections.
Question: In justifying your decision not to act
today, a lot of emphasis seems to be placed on recent data points, but if we
look at the economics text book, it teaches us that monetary policy acts with a
lag. Now, if we look at the lag with which it is supposed to act – two years –
we see inflation still below target then. We have also heard you say that there
is a significant degree of slack. Both pieces of evidence point to taking
action today. Now, cynics might say that the decision not to act owes more to
the political economy of the institution, rather than the economics of the euro
area. How would you respond to such criticisms? As a second point, you noted in
your last answer that this is based on the idea that monetary policy will
become more and more accommodative as time goes on. Now, you have also
mentioned that where credit conditions are working better – not just in bank
lending, but also in capital markets – it is the core, so there is not any
evidence that you are really seeing much of an improvement in credit conditions
in the periphery, so is it not a little bit complacent to assume that credit
conditions are just going to become more accommodative and think that this
warrants not taking more action today?
Draghi: On this last point, I did say that credit conditions remain
weak. But we also say that credit conditions are a lagged indicator of future
growth, and all in all, we are seeing some stabilisation of credit flows – not
only for core countries, but for everybody. In fact, if anything, lending
standards have become looser in countries like Italy and, to some extent,
Spain, for certain categories of borrower. So, we are seeing some improvement
there. Even though, as I have said, credit flows remain weak, we are seeing
some convergence – admittedly, mild convergence – in lending rates between
stressed countries and core countries. I will not repeat what I have been
saying for months now, but we continue to see improvements on the funding side
for banks – both in the core countries and especially on the periphery, where
in terms of the dispersion of the growth rate of bank deposits, we are at the
same level as we were in 2007. So, if we consider funding only from the
perspective of bank deposits, we can safely say that the fragmentation is over
from that perspective. But of course, there are other aspects of fragmentation
that are also very important, and we focus on what does not work, not on what
works.
Now, you are absolutely right: monetary policy exerts its effect
with a lag. And one way to look at the recent improvements is to say that our
accommodative monetary policy, which has been in place for years now, is
finally finding its way through the economy. Now, the lag of two years is
actually questionable, because unfortunately the lag depends on how well the
transmission channels of our monetary policy work. And the key actor in Europe
for the transmission of monetary policy is the banks. And so, one of the
greatest contributions that a credible comprehensive assessment can make is
actually to repair the bank lending channel and therefore speed up the
transmission of monetary policy relative to how it is today.
Question: Let me come back to the situation in
the Ukraine. How could the Ukrainian crisis impact the euro, the euro area,
non-euro area countries and the European financial markets? And the second
question is: Have you discussed any scenarios and, if yes, which?
Draghi: No, we have not discussed scenarios of different impacts
that the crisis could have. So far, we have seen a major impact on the Russian
economy and on the Ukrainian economy, and some financial impact on some
countries that are bordering that area. The impact on the Russian economy is
severe. However, it is very, very difficult to foresee what is going to be the
impact over a horizon of two or three years, because that is what we have to
look at if the crisis were to continue. For example, the impact on the energy
market, what could this be for Europe? If we look at the next six months, the
answer is: It is going to be very mild. If we look at a year and a half, it
could be very serious. But it depends on so many things. It depends on
alternative sources of energy, it depends on how this crisis will evolve, and
frankly, as I have said, we poor central bankers do not have enough information
to give a reliable assessment of the economic impact at such an early stage in
the crisis.
Question: Problem number one, and maybe number
two for European banks is the high level of non-performing loans. Do you think
that the creation of a bad bank or other mechanisms to split the non-performing
loans is the right solution, and if not what would you suggest? The second
question: you welcomed the European Commission’s communication. But yesterday’s
communication was very tough, very strict with Italy, but not so with France or
Germany. Do you really think that more sacrifices can improve the recovery or
growth?
Draghi: On the bad bank, I don’t want to enter into a discussion about the
specific instruments. But certainly what countries should do, what supervisors
should do, and what we will certainly do with the comprehensive assessment will
be to cope with non-performing loans and other factors or weaknesses in the
banks’ balance sheets squarely. The worst thing one can do is to pretend the
problems don’t exist. If anything, evidence from Japan from the 1990s and 2000s
is that zombie banks don’t lend. So the idea that people are afraid of the AQR
because they think that banks will then deleverage and will not lend – well,
they don’t lend anyway if they are zombie banks. And so the only possible path
is to cure and proceed and carry out surgery if needed. That is the purpose of
the AQR; that is the purpose of the comprehensive assessment. But I also think
fair credit should be given to national supervisors who, in view of the AQR,
are already taking prompt, corrective action with respect to their own banking
systems by increasing provisions, demanding capital increases so that banks can
be repaired. Whether the bad bank is the right instrument or not really depends
on the specific circumstances. The important thing, as I said before, is to
restore trust in the European banks’ balance sheets, and that is the ultimate
objective of the exercise and that is the necessary and sufficient condition
for the private sector to return to invest in the European banking industry.
As for the second question, while we certainly welcome the
European Commission’s communication, let me read what we said in the
introductory statement. We said “euro area countries should not unravel past
consolidation efforts”. It would be a disaster. If you think, as you said, that
there are so many sacrifices and so much pain because of the efforts that have
been undertaken now, would it make any sense to go back and squander all the
political and human capital that has been invested in these efforts? The
introductory statement does say not to unravel past consolidation efforts and
that high government ratios should be put on a downward path over the medium
term. Fiscal strategies should be in line with the Stability and Growth Pact
but should also be growth-friendly, so it is time to think or re-think about
the composition of the budget consolidation efforts. I will not dwell on this
because you have heard me saying too many times, really, what I mean by
re-thinking the composition. And then it says “national authorities should also
continue with the decisive implementation of structural reforms in all euro
area countries.” That is essential. There are several markets that, without
structural reforms, will not function again. One of them is the labour market,
where structural unemployment is high. One copes with structural unemployment
through structural reforms.
Question: My first question is on OMT because,
just one day after your last press conference, the German Constitutional Court
came out with a “non-ruling”.
Draghi: They would disagree with that definition, but those are your
words.
Question: That’s true, but there are opinions in
the market that, for now, the OMT programme is on hold because the Bundesbank
might not participate. What is your opinion on that? I would also like to know
your opinion about the IMF calling on the ECB for more stimulus in recent
articles. How do you feel about that?
Draghi: Let me say that the OMT programme is ready, it is there and
it is ready to be activated if and when needed. In this sense, we welcome the
referral of the OMT case to the European Court of Justice. OMT, in our view,
falls within our mandate of pursuing price stability over the medium term.
The IMF statement asking for more stimulus is one of the many voices
asking us to move in one direction, just as many others are asking us to move
in another direction or to do nothing. So I think the analysis that we are
carrying out at the present time, at least with respect to this monetary policy
meeting, diverges from what the IMF is saying. One should also ask the question
of what kind of stimulus here because, as I have said over and over again, many
of the problems that we face today are structural. Fragmentation is a
structural problem and one way to cope with it is precisely the comprehensive
assessment and asset quality review that we will be carrying out.
However, let me just say one last thing with respect to that. The
ECB – Vítor Constâncio and Danièle Nouy – are working on several issues:
undertaking the asset quality review and later the stress test, as well as
working on building up a totally new institution, the SSM, which we foresee
some 1,000 people working for. And then the question is what about the SRM?
Will the SSM start to take charge at the same time as the SRM will take charge?
This is an important point because to have a single resolution mechanism
working together jointly with the supervisory mechanism would align
responsibilities between the one European supervisor and the one resolution
authority. So there would be no misalignment of responsibilities. By contrast,
if we do not have one SRM, the responsibilities for resolution will remain
national, and so we will have a misalignment of responsibilities. We are
following with great attention the current discussion between the Council and
the European Parliament. The ECB view is that the mutualisation process should
be sped up and the governance of this new institution should be effective so
that the new institution, the resolution authority, could actually take the
swift decisions that are in its very nature because, as we all know, to resolve
a bank is a decision that is often taken in hours. So the governance of this
new institution should be such that it could decide in a matter of hours. And the
third point is that, of course, in order to have this gradual but not too slow
mutualisation, one has to have a backstop. And on the backstop, we have always
been very open: It could be a credit line from the ESM or it could be borrowing
from the markets with joint government guarantees.
Finally, and we have insisted on this a lot, including with you, I
think, we have to have a strict separation between the supervisor’s assessment
and the resolution assessment. I just wanted to make this point because these
are examples of structural reforms that would address a structural problem,
namely fragmentation.
0 comments:
Post a Comment