Following is a transcript of an exclusive CNBC interview with Ewald Nowotny, Governor of the National Bank of Austria, by CNBC's Louisa Bojesen in Vienna.
Louisa Bojesen (LB): We keep hearing rumours about a potential Greek deal. We see also markets trading on the back of these potential rumours. At what point does a development become important? Is it important at the early stages when it's presented at the staff level, or when it's presented to the Council. When does it really make a difference?
Ewald Nowotny (EN): Of course there are many stages of relevance. At the end of the day, it's the political decisions that really make a difference, especially for us at ECB – the European Central Bank is a rules-based institution. So we have clear rules, how to react to certain developments, and the main perspective we have to look at is how these discussions go on between the Greek government and the different European institutions. But this is of course outside our own sphere and we then react to developments in this sphere.
LB: We've had a lot of briefings from Greek officials through these negotiations – sometimes contradictory reports as well from these officials. Is it helpful for you to have that many updates along the way when we're trying to reach an agreement?
EN: Well there is always a lot of noise in such a situation, and I think the important point is to distinguish the noise from the fact. And what we want, of course, to a certain extent there might be something like a bit of psychological warfare but this is all the political side. So we are not involved in this. For us, it is quite clear that we have certain conditions to be met, the one condition is, for instance, whether we can accept Greek assets, Greek bonds as collateral. The answer is, for the time being, no. The second question is whether there are other ways of financing… this is the way of emergency liquidity assistance… also this is under the control and also under the risk of the national central bank, in this case, the Greek Central Bank. But it has to be… it has to get approval from the Governing Council. And for this, again, we have clear rules. We discuss whether this is fulfilled. So we are not part of this, let's say, general psychological games. We just deal with the facts.
LB: You mentioned collateral. The ECB's ELA scheme is pretty much the lifeline that's pretty much keeping Greece afloat. Would you consider changing parts of it, or restructuring it in a different way in order to help the Greek banks which could be potentially be looking… running out eligible collateral so they can stay afloat at least until an agreement is found?
EN: I think one has to be quite clear. We do not have flexibility to do, let's say, some financing outside our rules. I know there have been some ideas floating around that we might give some kind of interim financing just like that, I don't see any legal possibility for that.
LB: From the perspective of financial stability, what do you think the impact would be if Greece were to miss its next debt repayment in a week's time? What would the potential be for a Greek default?
EN: I think it is not so… not be good taste… style for central banker to discuss about this. What we are working… is this… within our mandate, we are trying to provide the liquidity, that we can do. This is also what we are doing. Of course we would also have to see what would be, let's say, a worst case scenario, what would be plan B to deal with this, but I think it is not a good timing to discuss this now. So I think the first, first priority clearly should be to get to a workable solution. But this of course needs the cooperation of all persons involved… all parties involved.
LB: The Greek government keeps talking about red lines. Do you have any red lines… does the ECB have any red lines?
EN: We are not involved in this, let's say, political bargaining process. We look at the results, and then we take our conclusions. But this whole 'red line game' is not our game.
LB: In general, what are you concerned with at the moment? What are you focussed on, where are your thoughts?
EN: Well, our main, main point of activity is of course to fulfil our mandate which means we have to take care of price stability. The ECB defines price stability as the increase in the inflation rate not above but close to 2 percent. The actual inflation rate is much lower now. So therefore we have our main main policy… intention is to get closer to this stability… stability rate. And we have first started this very extensive programme, in addition to the other programmes that we still have, we already had, of quantitative easing, that will involve buying up assets of more than 1,400 billion until September next year. And just to follow up with this programme and to make it work, that is our main concern and main challenge that we face now.
LB:You mentioned the ECB's mandate, let me talk to you a little about hysteresis. A buzzword that was very popular a number of years back, and now it's being brought out of the vault again. It's a physics term originally – it was used in 1986 by some policy makers who used it to define Europe's very high unemployment rate on the back of an economic shock .
EN: In my former life as a professor of economics, I did some papers on that. So very… close to the subject.
LB: So with regards to hysteresis – many people are saying that even if we see the European recovery happening, we're still going to end up with a very high unemployment rate across the Eurozone… somewhere in the region of 10 percent. Isn't it inevitable that the ECB is going to have to change away from a single mandate of price stability, of inflation, and instead look more towards a dual mandate structure. For example – inflation and unemployment?
EN: Well, the way I think how we see it… and I think the correct way, is that one has to have a clear view… what can be done by central bank, and what has to be done by other parts of political life… that means by fiscal policy, structural policy… so the role of monetary policy is an important one but is a limited one, especially with regards to employment, developments, it's quite clear that an expansionary monetary policy is a very important contribution. But it cannot be enough, so we see... let's say if you compare with the US, you see there is a role for fiscal policy… and the European situation, also especially for structural policy. If you look at the very successful example in Germany, where there had been… achieved a very strong improvement in labour market, this has been by a large extent been by structural policy. If I look at the Austrian experience, I think we do have specific features, especially let's say, programme for the young, educating the young, for training the young, that helped us to avoid this higher degree of youth unemployment. So this is not something for monetary policy but other fields and they have to play their parts. They're very important.
LB: But given that you have been involved with the topic of hysteresis in the past – you said you wrote papers on it – do you think we have stretched the economy too much now? Are we in the situation where it's not going to spring back and where we're going to be left with some uninvited remnants now?
EN: This is a very serious point. The problem is, of course, that after a certain period of time, cyclical unemployment might turn into structural unemployment. And then of course, it is a problem for the central bank because that means at the much earlier stage, you may get into an inflation problem. So this is something that we take very seriously. We are prepared to enter this discussion. We are central banks. We are not the ones who can do structural policy. We can give some advice in this field, but I think this clearly has to be a priority of European politics.
LB: If we have moved into a scenario where we start to see proper inflation, and at the same time, we're looking at growth. Isn't it going to be hard to manage the yield curve? And how is that going to happen if at the same time, the ECB is continuing to be a very big buyer of bonds… the economy is recovery. Are yields going to head higher or are yields going to head lower because the ECB's buying?
EN: Well, I would say, unfortunately, this is really not our problem. Our problem is that we have to foresee that… unfortunately – long periods of time… we will have high levels of… we will have to deal with rather high levels of unemployment. Especially in some Southern countries, where we have horribly high levels of youth unemployment. And it's quite clear even if there were strong macroeconomic improvements, that doesn't mean that you would have to do something on the monetary policy side. This does not reduce the need for structural programmes. I think this is something where one has to be quite clear. This is not macroeconomics to a certain extent, this is something with very specific structural elements. But of course, at the end of the day, it has to be based on adequate demand. And that is something where we can provide the financing side, but the rest has to come from the real economy.
LB: Can quantitative easing be removed as easily as applied?
EN: Well, we just watch with great interest the American experience…I think the Fed is doing quite a good job in being very cautious with its policy of tapering. So unfortunately, the economic situation in Europe is in a worse shape than compared with the US, so we are not at the same point of the cycle. So we are now in an upswing, but it is later than the US. So therefore we have some learning material, and in any case one has to be very careful about this. On the other hand, we have in Europe of course QE… that means buying assets, our main way of providing liquidity is by giving loans to the banks… to European banks. And this is to a certain extent kind of self-regulating. Because if the term of the loan is finished, automatically the volume goes down. This has been the case for the… ECB. We have seen that our outstanding assets have been reduced… have been going down in contrast to the Fed. This has been the main reason why we started this programme for QE.
LB: Let me also ask you about pension funds and the insurance industry. Because by law, they have to invest in a certain amount of bonds. And now with years of zero returns, it has become pretty hairy for them. Do you fear that the pension funds and insurance industry – they could be faced with a really serious issue coming up because of these very low returns?
EN: This is one of the side effects. We are worried about it. We have a strong discussion on that. For the time being, of course, with regards to life insurance, there has been a reaction in the way… let's say, that guaranteed returns had been lowered. So that there is a certain… space. I think also personally, also for the time being, if you look at the asset structure of insurance companies, they have of course a rather strong part of it… assets are with relatively high yield. There is one element to react… going into more high yielding, but also more risky parts. But there are limits for this. To a certain extent, it might be… but there are limits to this. So for me, this is one of the reasons why I think that, let's say, a situation of low interest rate is something that makes sense for a certain period of time, but this world of ultra-low interest rate is not a long term equilibrium.
LB: And especially when you have growth and inflation?
EN: So I think at the end of the day, we will return to normal relationships also with regards interest rates.
LB: What's normal?
EN: Normal is… if let's say you take an average of the last 20 years… something like this. But it's quite clear that for instance, as we have it in Europe, to a certain extent, negative interest rates are not a normal element of an economy. They may be necessary for a certain period of time, but it's not something that I see as a long term perspective.