WHEN: FIRST ON CNBC, today Friday 23rd January.
Following are highlights of the unofficial transcript of a First On CNBC interview with Executive Director of the European Central Bank Board, Benoit Coeure with CNBC's Geoff Cutmore from Davos 2015 – World Economic Forum.
Following is a link to an embeddable video clip of the interview on CNBC.com: http://www.cnbc.com/id/102362366
All references must be sourced to a 'First on CNBC interview'.
Benoit Coeure (BC): Well, our decision was entirely driven by what we have to do, which is to care about inflation and Europe. We have seen inflation expectations going lower, according to all our measures, so lights were blinking red across our dashboard and we had to do something. The only question was what was the right instrument?
Geoff Cutmore (GC): Are you confident now that you have right package of measure in place? The market has been asking for this for a long time so you think you have got it right as far as the market is concerned?
BC: We think it will work. We are pretty convinced it will work. It will work because it is big, it will work because it is steady it will work because it is open-ended so we will have everything in place to convince the market, but also to convince companies, to convince people in Europe that inflation will go up and it will go back towards two percent.
GC: Earlier in the week it seemed that there may be some doubt as to whether the package would be ready and in place for this meeting – can you talk to us a bit about what was going on in the background, and why there may have been some doubts as to whether it was ready?
BC: You want to know all the details, you will have the details when we publish the accounts of the discussion, and you know this will be the first meeting where the ECB will publish a detailed account of discussion, which will come in four weeks. But, to be very short, that was a discussion on how to design the instrument in a way that makes sense, in a way that is efficient and in a way that is fit to what Europe looks like, and it couldn't be like in the US, it couldn't be like in the UK, it had to be fitted to what we are, who we are, how we work.
GC: Are you basically saying it had to fit with what Germany would accept and what those more Germanic members of the Council were willing to work with?
BC: You are probably referring to the discussion on risk-sharing, and who buys the bond and who bears the risks of the bond. That is not the most important discussion. Now we have a package, it is big, we'll buy bonds, and the discussion on risk sharing, it is important for us, it is important because we want to fit to our institutional framework, and this is not about Germany, this is about Europe. We don't have a fiscal union, we don't have a European Treasury, so we had to do it our own way, in a way that fits the way we are, which is a monetary union without a fiscal union.
GC: My understanding is that, coming in to this, Chancellor Merkel actually said to Mario Draghi, you know what, I've got your back,you can go ahead with this. Was this personal relationship important?
BC: It is not about lecturing the ECB or pressuring the ECB, we are independent and at the end we speak our mind, we get our act together and politicians don't have an impact. But of course it is important to understand what is going on elsewhere, what is going on outside of the ECB. The German chancellor has a good point, which is that whatever the ECB does is not enough to recreate growth in Europe. We want to put Europe on the right path, put Europe back on track and that is a track towards growth, but growth, this is not the ECB, this is governments, this is reforms, this is investment, so the German chancellor is absolutely right.
GC: But is it true or accurate that Jens Weidmann's position was more hard core, if you like, against the policy, than the chancellor's?
BC: We are not disclosing individual positions, what I can tell you about yesterday's discussion is that we had a lot of discussions on what is the right time to do it, that was not a discussion on whether asset purchases is a legitimate instrument, it is a monetary policy instrument, it is in our toolbox, this was accepted by all Governing Council members, that was unanimously accepted. The discussion was 'what is the right time to trigger it', is it too early, is it too late? Some governors feel it is too late, some governors' feel it is too early. And at the end we had an overwhelming majority to decide it is the right time, we do it now and we start doing it.
GC: I don't want to make trouble but what I do want to do is make the market understand the character of the conversations and whether there will be flexibility going forward if there needs to be adjustments to the programme. And it is very important that the Chancellor is on board, and perhaps it matters that Jens Weidmann agrees, maybe it doesn't. That is why I am asking the question- because the market wants to know just how signed up the Germans are here. Was there a division between Weidmann and the Chancellor?
BC: I'm not part of that discussion, I just don't know. What I can tell you, is as far as the Governing Council of the ECB is concerned, we were in a position yesterday to take that decision, which is an important decision, it is an important step forward and it makes it very clear that this instrument, large-scale asset purchases including government bonds, is part of our toolbox. We will use it, we don't need really to adapt it in the sense that it is open-ended and we have been very clear, we'll do it as long as needed to come back to medium-term price stability.
GC: I was very encouraged by the lending survey, the latest lending survey we saw. In fact things are improving. Did you at any point think, you know what we may not need to do this because the data is getting better?
BC: Not at all, because what matters at the end is inflation and inflation is still low by all standards. So we had to act on inflation. We are seeing better signs, more encouraging signs on growth that is true. We are seeing rates, lending rates going down, and being more compressed across the region that is also good. That will make the whole programme even more efficient. It is much better to lean with the wind than to lean against the wind. So if we can have a combination of forces in 2015 putting Europe back on track and creating growth that is even better.
GC: You got some very strong market reaction after the announcement; this policy is about changing market expectations, particularly on the interest rate curve. Give me your reaction to what you saw in different asset classes yesterday, were you happy, satisfied? What was the view of the council and yourself?
BC: It is encouraging, it shows that the programme is credible for market participants but it is obviously too early to tell, we are only one day after and what matters at the end for us, it is inflation, it is not market reaction, so we have to see it feeding through to the European economy, lifting inflation expectations and creating growth and that is what we want to see.
GC: Let me ask you through about the euro specifically. A lot of economists in the wake of this, Citi included, have suggested that parity or sub-parity, is a possibility with the US dollar sometime in 2016. How does the council feel about that prospect?
BC: We don't have an exchange rate target, we do monetary policy and we do the monetary policy in the way that is a fit to our inflation target. Exchange rate is a transmission channel, it moves up and down not only because of our actions, because of many other actions so it is only an outcome, it is not a target.
GC: But the key issue is not the target but the way in which it happens given that stability in all senses is your mandate?
BC: We want to see asset prices across all market segments reacting to what we do. Building the expectation of our future action into market prices, this has been the case on the foreign exchange market as it has been the case in other market segments, there is nothing unusual here.
GC: The other issue I wanted to get into, just on this inflation side is obviously oil is something that is outside the council's control but seems to be a much greater deflationary force than anybody anticipated. How does that fit in with the announcement that you have made, because clearly that is running against you as you try to create inflation.
BC: Well, first let's have the perspective right, oil is good news, the low oil price is good news for the European economy. This will create income, this will create growth. In Europe, growth will be higher in the euro zone thanks to the low oil price. That is good news. It is true that for us, it has the potential to further move inflation expectations away from two percent, which for us would be a concern so that was certainly part of the discussion yesterday, that was a consideration in our discussion yesterday. But the low oil price it good news, it will create growth in Europe.
GC: Obviously you are going to monitor what happens very carefully once the programme begins in March. Can you share with me a sense of how that assessment programme will work and at what point you may feel that you need to increase, or maybe decrease the size of the purchases?
BC: Well, we have given ourselves time, in a sense because we have said we would do it, we intend to do it until end Sept 2016 which is 19 months, so we will do it until end September 2016 and down the road we will monitor inflation expectations, we'll see if growth comes back and then we will advise but we have a little bit of time to assess, we are not under pressure because this programme is intended to last until Sept 2016.
GC: Obviously within it, there was a message to the Greeks, perhaps it wasn't meant to be explicitly stated but it does appear to tell them as they go into their election at the weekend, if you want to participate in this programme you have to remain part of the single currency. Was that intentional?
BC: Oh but Greece will remain part of the single currency, I have no doubt about that. So the message to Greece is not a new message, and it is not a message to Greece only, it is a message to all euro zone countries: if you want the ECB to take your bonds as collateral, if you want the ECB to be in a position to buy your bonds you need a European and an IMF programme and this is because we need to see a dynamic of reform in the economy and this has nothing to do with the election. The election, it is a political discussion; reforms will be different if the government is different and that is democracy.
GC: Just give me a personal take on this. Look – the States finished its programme effectively three months ago, we are six years on from the financial crisis many Europeans have been waiting for this day to arrive. Do you think that this was a watershed moment where we have now turned a corner and just share with us some sense of how you felt when finally you knew that the package was ready to go.
BC: Well, I was certainly relieved personally, because that is a lot of work, a lot of discussions, and now this is done, we'll start doing it and now this is about acting, this about buying bonds so we are moving to the practical phase which is much easier. Are we out of the woods? Is Europe out of the woods? Certainly it is looking better, it is looking much better, we have a conjunction of factors that makes me much more optimistic on European growth looking forward and it is not only what we have decided, it is also the low oil price, it is the way the exchange rate has adjusted in the past and this is also the dynamic of reform that we see in some countries. But in the end, as I said, whether Europe can create long-term growth, that is a question for investors, that is a question for business to decide, do they want to invest in Europe, is that an attractive environment, is that a business friendly environment, that is not for the ECB to decide.
GC: And just to wrap up, I went to George Soros's dinner here and he said the one problem with muscular QE now for Europe is that there isn't some form of fiscal easing taking place alongside and as we have seen in the US and in Europe, what you end up with QE sometimes is just one sector of society steadily gets wealthier while another part gets left behind. How do we prevent that happening in a European context?
BC: Well certainly we need fiscal policies to be in tune, to be there also to deliver growth and now the situation is very different across countries and many countries in Europe don't have margins of manoeuvre, they don't have fiscal space. Debt is high - debt is still very high in many places. So the question is more how to create space to invest in countries that do have fiscal space and also at European level and that is why the Juncker plan for instance is a very good development, we have supported it and we hope it will come and that money will be spent as soon as possible to lift the economy.
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