Interviewed by Geoff Cutmore at the World Bank Group/IMF Meetings Lima, Peru on 9 October 2015
Geoff Cutmore (GC): Since the low of 2013 it has been Germany and Spain that have been delivering slightly better economic data and yet, in recent weeks, what we have seen is perhaps they have come off the boil a little bit. Italy still not really knocking it out of the park but doing a little better than expectations and France actually surprising to the upside a little bit. Do you think that tellsus now that the periphery economies and France are as competitive as Germany?
Benoît Cœuré (BC): Well my first remark would be that we would look at it from an ECB perspective; we don't want to focus too much on the short term ups and downs. What we see isa steady recovery momentum in the Eurozone. This is being confirmed, so one month it comes from Germany, the other month from Italy. When we look throughit you see a steady recovery momentum in the Eurozone and that is exactly what we want to see and then yes we are seeing reforms finding their way into the economy in the periphery of Europe at different paces, at different rhythms but yes reforms are working, they are delivering.
(GC): Quite a lot has been achieved since the bottom of the financial crisis and yet they don't get talked about too much at the moment. Do undersell that story? We've had banking union, we've had all sorts of progress in the area of reforms. Does that message get lost when people just look at the headline data?
(BC): Well it's not so bad not to be too much in the news, so we do look at the discussion, we do hear the discussion here in Lima. It is not really about Europe, which is good news: it shows that there is trust in our recovery. It is true that a lot has been done. A lot has been done from an institutional standpoint and there is banking union in particular. A lot has been done in countries reforming their economies, reforming the labour markets and we are gradually seeing it in the numbers.
(GC): What is it though that needs to happen next, Benoit, for Europe to get back its confidence, to get back its swagger? Because, would you agree with me that the uncertainty itself is something that is undermining confidence and preventing economic activity?
(BC): That is absolutely right and you can see it in the numbers, you can see it in the lack of investment that we are (seeing) today in Europe. We want investment to comeback and investment is about confidence. Investment is about animal spirits, so you need these animal spirits to gather and to show up and for that you need reforms in countries. There are very high expectations towards Europe, people want to be in Europe, they want Europe to deliver jobs, they want Europe to deliver reforms. We've got to live up to these expectations.
(GC): How do you deliver that message from an ECB perspective?
(BC): Well I guess the first thing the ECB has to do is to just do our job, which is to bring inflation back towards 2 percent and to create an environment that makes it possible to invest and to reform that environment. Either now, the ECB is not going to create projects, the ECB is not going to create jobs, we are creating the environment and our governments have to get their act together and to reform, to do tax reform, to do regulatory reform, to instil confidence into the business community.
(GC): We've had two very interesting political outcomes recently. Alexis Tsipras easily surviving a no confidence vote this week. We also have seen, of course, a pro austerity minister returned in Portugal. What do you think that tells us now about how Europeans feel about their economic future?
(BC): Well obviously I don't want to pass a judgement on political outcomes but what we can see is that the people of Europe understand the need for reforms and that has to be done differently in different countries and different environments but there is a need for reform that is being very well understood.
(GC): But is it a reflection of perhaps people's improving incomes or the fact that they feel financially better off?
(BC): They feel better because the whole environment is better than it was only one year ago or six months ago. We are moving out of a crisis and conditions are there for recovery to kick off, to accelerate and this is understood but now people have to create the right projects, they have to invest, they have to create jobs and that is not something the ECB would do or can do.
(GC): Let's talk about what the ECB can do for a moment here, because the markets now very much are looking at China and its impact on Germany and wider Europe and the fact that the Federal Reserve has delayed its interest rate increase and they are saying that these two issues point to the ECB ultimately having to extend its program or indeed deepen it. Do you think that those institutions are making a mistake by jumping to that conclusion?
(BC): I guess we are all in the same place here. The global economy is growing modestly and the Eurozone is recovering modestly and we don't want to waste that recovery so we have to be very careful and certainly, in our judgement, in our analysis the risks come from the outside. So we see a downside risk to recovery, that downside risk doesn't come from inside the Eurozone, it comes from outside the Eurozone, and in particular from emerging market economies we are following very carefully and of course we have got to be ready. If anything were to happen, we want to know what we would do. Here in Lima we are very much in fact finding mode. We are listening. We are listening to Chinese colleagues,listening to the IMF very carefully and if anything would be needed we need to be ready but it is too early to pass that kind of judgement.
(GC): So we shouldn't prejudge here. I wonder if part of the reason is there's still a lag effect in the existing QE program we have?
(BC): Of course,we have only executed, delivered one third of the program. We are also benefitting from these lagged effects of the previous measures: targeted liquidity tenders, forward guidance, low rates. It is all feeding into the economy at a slow pace so it is certainly too early to measure the full extent of what we have done over the last couple of years.
(GC): So, premature to start thinking about another QE program?
(BC): It's premature to discuss it but it is certainly out duty to be prepared to cope with all kinds of contingencies.
(GC): The oil price has been fascinating recently. We are back at $50 a barrel here. Starting to ask a question, are inflation expectations being pitched too low because people are fixated on a continuation of a very low oil price?
(BC): Inflation expectations are well on course in the long term so the whole discussion is about how fast will they come back to 2 percent, how fast will inflation comeback to 2 percent? The faster the better, obviously, so if the oil price could stabilise, if that could give a sense of stability and security to economic actors that would certainly be good news in that picture. That 2 percent inflation target is really the encore for the whole recovery process in the Eurozone. It is very important that it comes as quickly as possible.
(GC): But is there potentially a faster read out here because of what's happening in the oil price. I mean if anybody's taking a short euro position on the expectations of continued inflationary pressure from low energy prices, should they be reviewing that position and thinking hard as to whether they want to talk that chance?
(BC): Well it's not going to change much to the growth outcome, to the growth outlook… but if it can bring inflation expectations sooner in line with 2 percent that would be certainly a positive factor for the whole recovery process.
(GC): And just one final question. We are talking about how Europe gets its mojo back, if you like, its swagger. Do you think credit availability and bank lending now is ona clear upward trajectory from here? Any reason to be concerned at all that the credit taps are starting to get turned off?
(BC): No, the credit taps are clearly open everywhere in the Eurozone and what we have done at the ECB has been very helpful. It is really finding its way to the end ofthe pipeline, that is to the corporations, to the companies. Funding costs to non-financial companies have decreased by 75 basis point over the last year so there's no financial obstacle to the recovery. The obstacles are elsewhere.That's really about confidence coming back and animal spirits coming back.
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