As soon as the additional spending needs that are related to the refugee influx are projectable, they have to be financed by reprioritising public spending or by additional revenues rather than by growing deficits, says the President of the Deutsche Bundesbank Jens Weidmann with an interview to Naftemporiki Newspaper, Greek financial daily. He also expresses his views about the European deposit guarantee scheme, the QE, the NPLs in the Eurozone and the Greek case.
Vassilis Kostoulas
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@VasKostoulas
Stability and Growth Pact / Refugee issue: “The Stability and Growth Pact already allows for dealing with irrefutable and unforeseeable expenses like the costs associated with the refugee influx. But as soon as the additional spending needs are projectable, they have to be financed by reprioritising public spending or by additional revenues rather than by growing deficits”.
Single deposit guarantee scheme: “A common deposit guarantee scheme would mutualise the risks stemming from these national policies. Unless these policies are shifted to the European level as well, therefore, a single deposit insurance scheme would be premature”.
Inflation: “The dampening effect of lower oil prices on inflation will peter out over time, and overall price pressure is expected to increase given the gradual economic improvement forecast”.
Greece: “It is premature to speculate about a possible inclusion of Greek bonds in the Eurosystem’s sovereign bond purchase programme (...) Taking into account the low refinancing needs over the coming years, further debt relief does not seem to be a matter of particularly urgent concern (...)All efforts should now be focused on ensuring that the mutually agreed Greek adjustment programme is fully implemented”.
NPLs: “It is vital to create a legal environment that does not overstrain borrowers, and at the same time enables banks to enforce their claims in a timely manner, including the foreclosure on collateral if necessary”.
Macroeconomic Imbalances: “Μost of the German current account surplus stems from trade with countries outside the euro area. The surplus vis-à-vis the rest of the euro area is actually rather small at 1.7% of German GDP and can hardly be called unsustainable”.
German economy: “Τhe impact of the refugee issue will be perceptible, in terms both of fiscal expenses and of a possible increase in the labour supply. Whether or not this additional labour supply can actually be used to mitigate Germany’s demographic challenges depends on future economic policy decisions”.
The full interview:
The ECB provides up to €60 billion on a monthly basis for the purchase of government bonds, yet inflation still remains at a very low level: 0.1% in November. Why, in your opinion, is the inflation rate not increasing and how do you assess the recent decision to further extend the QE programme?
Let me start by stressing that the low inflation rate is largely due to a fall in the price of oil – and a low oil price is not dangerous in itself, but rather a tonic for the economy at large, as households have more money to spend and businesses have lower costs. The dampening effect of lower oil prices on inflation will peter out over time, and overall price pressure is expected to increase given the gradual economic improvement forecast. This said, and although second-round effects are not visible, the inflation rate is rising from a low level and has been significantly below our definition of price stability for a protracted period of time. However, taking into account our already very accommodative monetary policy and the unintended risks and side-effects of our monetary policy measures at hand, one can reasonably disagree about the need for further monetary stimulus.
Ηοw do you approach the discussion concerning the promotion of a single deposit guarantee scheme in the Eurozone?
In my view, it is too early for a European deposit guarantee scheme. As of today, the quality of banks’ balance sheets is heavily influenced by national policies, for example by differing insolvency regimes for firms and households and foreclosure rules. A common deposit guarantee scheme would mutualise the risks stemming from these national policies. Unless these policies are shifted to the European level as well, therefore, a single deposit insurance scheme would be premature.
What is more, European banks have high concentrations of sovereign debt in their balance sheets due to the fact that in banking regulation, sovereign debt is currently treated as risk-free. Mutualising bank risks would then be tantamount to mutualising sovereign risks. Before discussing a common deposit guarantee we should therefore reduce the risk in banks’ balance sheets and end the privileged regulatory treatment of sovereign debt.
Non-performing loans in the Eurozone total about €900 billion. To what extent do they constitute a threat for the European banking system and how do you think that the problem should be tackled? The extent to which the high stock of non-performing loans constitutes a threat mainly depends on the level of loss provisioning, that is the extent to which banks have already set aside means to cover potential losses from these loans and the quality of the collateral. Accounting rules, particularly for smaller banks, are not homogeneous in Europe. Thus, the need to build provisions varies for those banks with regard to the time and extent of recognition among member states.
To tackle the problem of non-performing loans, it is first and foremost important that regulators and auditors urge banks to recognise loan losses in a timely manner and – if necessary – to raise new capital to cover these losses. This is exactly what was done in the context of the Asset Quality Reviews conducted in 2014 for significant banks in the euro area and recently in Greece. Those measures are important to prevent the evergreening of loans to de facto insolvent borrowers. Furthermore, it is vital to create a legal environment that does not overstrain borrowers, and at the same time enables banks to enforce their claims in a timely manner, including the foreclosure on collateral if necessary.
The European Commission urges countries with high current account surpluses, such as Germany and the Netherlands, to turn more towards domestic consumption and domestic investment, referring to surpluses that exceed 7% of GDP as "excessive" for the balance of the euro area. What is your opinion?
Of course, the rules of the new Macroeconomic Imbalance Procedure should also apply to the Netherlands and Germany. It is important to note, though, that most of the German current account surplus stems from trade with countries outside the euro area. The surplus vis-à-vis the rest of the euro area is actually rather small at 1.7% of German GDP and can hardly be called unsustainable. It is also true that the euro depreciation in the context of the monetary loosening in the euro area played a part in increasing that surplus.
Still, policies that raise growth potential, such as liberalising the service sector and removing hurdles to business start-ups, are most certainly sensible and welcome. Since they stimulate investment and growth, they will also lower the current account surplus.
In contrast, policies that only aim at reducing the competitiveness of the German economy, such as wage increases substantially above productivity growth, will leave not only Germany but the whole euro area worse off. And boosting public investment via deficit spending, as some have asked for, would not only undermine confidence in German public finances: it would have only a very limited effect on the economies of the other euro-area countries. This is because the import content of German public investment is very low, so that spill-overs are limited at best.
Banking circles in Greece estimate that after the first – successful – evaluation of the programme, the country is likely to participate in the ECB's quantitative easing programme. Do you consider these expectations to be sound? Is the Greek programme on track?
At this point in time, it is premature to speculate about a possible inclusion of Greek bonds in the Eurosystem’s sovereign bond purchase programme. All efforts should now be focused on ensuring that the mutually agreed Greek adjustment programme is fully implemented.
Analysts in the Eurozone express the view that a new – indirect – "haircut" of the Greek debt, which currently exceeds €300 billion, is a resolved decision that will be implemented at the appropriate time, in line with the country's performance in implementing reforms. What is your assessment? What kind of interventions should be expected in the Greek debt and when?
Again, the most important task now is to fully implement the adjustment programme. This will not only raise growth capacity: it will also dispel uncertainty, which is a drag on investment in its own right. The government’s full ownership of the programme could therefore go a long way to improving economic conditions.
Whether further debt relief is also necessary to improve the Greek situation is for the European governments to decide. The headline debt burden is certainly substantial, but so are the concessions the official creditors have already made with regard to repayment conditions. As a result, interest payments relative to GDP were lower in Greece than in Spain, Portugal and Italy in 2014. Taking into account the low refinancing needs over the coming years, further debt relief does not seem to be a matter of particularly urgent concern.
Based on the data you have in front of you concerning the Greek banking system and looking at international experience, when do you estimate that it will be possible to talk realistically about removing capital controls in Greece?
The capital controls in Greece were put in place by the Greek government, and it is up to the Greek government to decide when it is appropriate to lift the controls. What should be clear, however, is that the Eurosystem should not again find itself in a situation in which it is financing capital flight via emergency liquidity assistance to banks because investors’ confidence in the economic policy of one country falls abruptly.
Do you think that fiscal facilitations should be granted in countries that face the strongest pressures on the refugee issue?
The refugee crisis is undoubtedly an enormous challenge in some European Union member states – and that is true not only of the fiscal burden. The Stability and Growth Pact already allows for dealing with irrefutable and unforeseeable expenses like the costs associated with the refugee influx. But as soon as the additional spending needs are projectable, they have to be financed by reprioritising public spending or by additional revenues rather than by growing deficits. Incidentally, I am convinced it is a misconception that sound fiscal budgets get in the way of fulfilling important public duties. The opposite is true: sound public finances are a precondition for being able to handle specific challenges.
Ιn your opinion, is the refugee issue capable of having a significant effect on the outlook for the German economy and the rest of the Eurozone?
For the German economy, the impact will be perceptible, in terms both of fiscal expenses and of a possible increase in the labour supply. Whether or not this additional labour supply can actually be used to mitigate Germany’s demographic challenges depends on future economic policy decisions. Other experience suggests that the economic integration of refugees is a protracted process, as many of them first need to acquire the language and job skills necessary to succeed in the labour market. As Germany is taking in a significant share of the refugees seeking shelter in Europe, the impact on most other euro-area countries will be lower by comparison.
