ECB’s Quaden Says in Europe ‘A Crisis Is Needed to Progress’
European Central Bank Governing Council member and Belgian central bank Governor Guy Quaden, who retires today, comments on inflation, monetary policy and the euro.
He made the remarks in an interview in Brussels yesterday.
On past and future challenges for the ECB:
“Building up and preserving the credibility of a new currency and a new institution was the biggest challenge for us in the Governing Council of the ECB. The introduction of a new currency itself was a huge technological challenge, a type of landing. The biggest economic problem after the technological challenge was to build the credibility of the new currency on the basis not of the average credibility of the different currencies which have merged into the euro, but on the basis of the national currency with the highest credibility. And I think we were able to do that.”
“We were able to build that credibility and also to preserve the credibility of the euro in the most difficult times. Sure, there was a financial crisis and there is a crisis of the debt in particular in some countries of the euro zone, but the euro itself is and remains a currency with a high credibility. And that was due to the fact that we had and still have a clear strategy -- price stability in the medium term. It’s our constant strategy. But we were also capable in recent difficult instances of flexibility and even some audacity. Under the leadership of Trichet we have reacted quickly and appropriately.”
“The euro is a respected currency in the world. The exchange rate of the euro is not a target, it’s not a measurement of the credibility of the euro, but it is still an indication. But there are problems. Recent events have demonstrated the shortcomings in the economic governance of the euro zone and the main challenge for the months and years to come is to improve effectively the economic governance of monetary union.”
On leaders’ response to the fiscal crisis:
“The recent decisions are encouraging. I refer precisely to the strengthening of the pact for stability and growth, to the new pact for the euro about competitiveness of our countries; I refer also to the European Stability Mechanism. All these decisions, rules and procedures go in a good direction. The problem now is they have to be implemented and respected and if needed sanctioned. We had with these dramatic events a ‘prise de conscience.’ It is often the way followed by Europe -- a crisis is needed to progress.”
“The response to the recent problems is much more collective discipline and fully respected. Personally I would say it’s a step to more political union in Europe.”
“I have a certain frustration for the past and I have hope for the future. The pact for stability and growth was not respected and the infractions were severe in some countries like Greece. Discipline should not only concern fiscal policy and the internal accounts but also external accounts, that means the competitiveness of every country. To restore competitiveness and sow the potential for long-term economic growth, some countries are now in a difficult adjustment process, which is painful in the short term but which will be good for the long term.”
On interest rates:
“We are not pre-committed. I will not take part in the meeting next week but I wouldn’t be surprised or unhappy if indeed the Governing Council were to decide on a cautious increase of its interest rates.
“According to the metaphors, the images journalists like, I’m not a hawk, I think because I never use words like martial- arts rhetoric. Am I a dove? I’m not sure of that. I’m a pragmatist.”
“Two years ago, when we were confronted with the most severe recession since the 1930s and inflation which was negative or very low, I was strongly in favor of a very accommodative monetary policy. We ought not to repeat the mistakes of the 1930s.
“But we are two years later. The context is not the same. I don’t say that economic growth is fantastic and that inflation is tragic, but both growth and inflation have become again significantly positive and in this new context it seems difficult to me to say that this very, very low level of official interest rates of 1 percent is still appropriate. I think that a cautious increase of the official interest rates from that very low level cannot hamper the economic recovery.”
On non-standard policy measures:
“There are still a lot of fragilities in the banking sector, financial markets are not fully stabilized yet, that’s clear. But don’t forget, we don’t have only standard monetary policy but also non-standard monetary-policy measures. We said frequently that we can manage these two policies separately, independently. We do what we said. We have decided to maintain at least for another quarter the non-standard monetary-policy measures and it’s not impossible at the same time to move on the field of standard monetary policy, that means the interest rates.”
“We decided to maintain non-standard policy measures for another quarter. It doesn’t mean that they will be abolished in three months, it doesn’t mean that we will continue with the same measures later this year. My colleagues will have to assess the situation, in particular on the basis of the new stress tests.”
On the banking system:
“Some banks, not all banks, are still in a difficult situation and in the case of Ireland it’s not a secret. It’s quasi the whole Irish banking sector which is in great difficulties. The problem is indeed to sort out the stronger from the weaker banks in the European Union and in the euro zone in particular. It will be the purpose of the next stress-testing exercise. At that time, if we see that stress tests reveal particular weaknesses and fragilities in some banks, the shareholders and the authorities have to come at the same time with remedies, with solutions.”
On commodity-price increases:
“We are used to a certain extent to fluctuations in the prices of oil and food. It will still be the case but there is probably a structural trend for rising commodity prices. The importation into our countries, industrialized countries, of goods from emerging markets, with lower wages and costs, was one of the factors explaining the great moderation of inflation at the beginning of this century. Now, living standards are fortunately improving in emerging countries and their consumption, especially of commodities, is increasing.
“Consumption in these countries will possibly now contribute to an increase of inflationary pressures in the world. Potentially it could be a real problem for the years to come, for monetary policy and central banks.”
“It is not excluded that at some stage central banks, and the ECB in particular, will have to amend somewhat their targets, but it would be absolutely premature to do that now. The trend has to be confirmed. The priorities are to reduce and contain the demand for energy, in particular in advanced countries, with energy-saving policies, and to increase the supply of food and food production.”
On divergences in the euro region:
“In a monetary union, you have regional differences and there is one single monetary policy. Regional differences have to be addressed with other tools of economic policies, structural policies in particular, and income policies as well. There are monetary tools and monetary policy is a single one but there are other tools for the problem of regional and national differences. It’s mainly the responsibility of political authorities and social partners in the individual countries.”
“We are not blind or indifferent. It’s not our main responsibility. It’s the responsibility of national political authorities and of national social partners, unions and enterprises. But we are not blind or indifferent at the level of the ECB. The so-called non-standard measures are related to difficulties in the banking sector and in financial markets, which are more severe in some countries than in others.”
“The ECB is a particularly transparent central bank. We are the only large central bank, until now, where the president explains one hour after the decision why the decision has been taken. We are never pre-committed, we can act at any time, but we are predictable as much as possible.”
“The president of the ECB has regular hearings in the European Parliament and all the national governors, me included, have regular hearings in our national parliaments. And we frequently have interviews with the press in order to explain and justify our policy. It’s the price we pay for our independence -- to explain and to convince. I do that with pleasure.”
“It’s very important to communicate openly but it’s very difficult to communicate adequately. The problem is that we have to speak with very different audiences which are not used to the same vocabulary, from specialists to ordinary people to politicians in the parliaments.”
On his career:
“I was not the manager of a relatively small national currency as was the case with my predecessors, but the co- manager, with 22 colleagues, of one of the two biggest currencies of the world. It was a pleasure but it was also challenge.”
“I’m the chairman of a committee that studies the budgetary consequences of the aging process. My goal is to live a long time and in very good health. It’s an excellent goal but if it’s a success it will be costly for the budget and the social security system. So in the next years, I have to continue to contribute to the financing of the social security by working, but not at 100 percent or the 120 percent like it was the case in the latest years with the financial and sovereign debt crises.”
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