The European Central Bank’s bond-buying program has been heavily criticized in Germany. But ECB Vice President Luis de Guindos says it is a necessity in these times of crisis. He also praises the German response to the economic impacts of the coronavirus pandemic.
DER SPIEGEL: Mr. de Guindos, because of the COVID-19 pandemic, the European Central BAnk is buying 1.35 trillion euros worth of eurozone government and corporate bonds on the capital market. By doing so, interest rates are kept low and countries like Italy are able to obtain fresh money cheaply by selling new bonds. German critics, in particular, argue that the bond buying policy is the same thing as state financing. Rightly so?
De Guindos: Monetary financing is prohibited by European treaties. The ECB’s decisions are driven by our price-stability mandate. We are experiencing a severe economic crisis: Our forecasts predict that, in the medium scenario, the euro-area economy will shrink by almost 9 percent in 2020 and that prices will only rise by 0.3 percent. This is significantly lower than our inflation target of just under 2 percent. We are therefore buying more bonds to promote economic growth, achieve our inflation target and prevent fragmentation – an overly strong tightening of financing conditions in some Eurozone countries. We are acting solely according to the principles of our mandate. Faced with this big drop in GDP and inflation, we had to act. It is our duty to do what is necessary within our mandate.
DER SPIEGEL: The ECB is currently discussing a new strategy. We have a suggestion as well: Why not identify 0.5 or 1.0 percent as your new inflation target. Then you will have essentially fulfilled your mandate and can stop buying bonds.
De Guindos: It’s really not that simple. But yes, in the context of the strategy review, we will be looking at the inflation target. We will also listen to a wide range of stakeholders, academics and representatives of civil society.
DER SPIEGEL: Some have the feeling that you are measuring inflation incorrectly. Residential property, for example, has been growing more expensive for years, stock prices are rising, and many people feel that life as a whole is becoming much more expensive than the official data suggest.
De Guindos: Eurostat calculates inflation for the euro area on the basis of data from each country. This measurement of inflation is considered appropriate. However, it is always possible to improve it and we are looking into this, for example, in the treatment of owner-occupied housing. In our strategy review, we will take that into account. Unfortunately, the pandemic postponed the work and we are now aiming to present the new strategy in mid-2021.
DER SPIEGEL: If asset prices for real estate and stocks continue to rise, the rich will become even richer. Those who have few or no assets will end up empty-handed. That increases social inequality.
About Luis de Guindos
Luis de Guindos has been vice president of the European Central Bank since 2019. An economist by training, he previously spent several years heading up the Economy Ministry in his home country of Spain. He is a member of the conservative party Partido Popular.
De Guindos: The best policy to counteract social inequality is to create growth and jobs. Monetary policy has greatly helped achieve this. Please do not forget that, at the present juncture, as in 2015 and 2016, we have deflationary pressures that we must avert.
DER SPIEGEL: Is it even possible to leave crisis policies behind? The U.S. Federal Reserve tried to do so in late 2018. It raised interest rates, which sent global capital markets into a panic.
De Guindos: In 2018, the ECB also decided to stop purchases of government bonds. So you can see that we can get out, if the economic conditions and inflation data allow it. At that time, we had to relaunch the program after 10 months due to economic weakness and decreasing price pressures. But if the situation improves and the inflation outlook returns to a level in line with our mandate, we can return to exit mode.
DER SPIEGEL: Do you really think that’s still possible? The ECB itself says that factors like the aging of society and globalization are exerting long-term pressure on inflation. If that’s the case, you will probably never reach your inflation target of just under 2 percent. You will continue buying bonds and critics will keep accusing you of implicit government financing.
De Guindos: I see no reason why inflation shouldn’t increase again. At the moment, the pandemic is depressing global demand and oil prices, and, therefore, consumer prices. Our forecasts make it clear that they will remain low for some time. But de-globalization and the disruption of global value chains could also push inflation up.
DER SPIEGEL: You are spending much more on Italian government bonds than its capital contributions to the ECB would dictate. Is that a violation of the law? Recently, for example, the ECB purchased around 20 percent of the Italian bonds on offer, whereas according to the ECB capital key, it should only be 14 percent.
De Guindos: No. For the pandemic emergency purchase program, the benchmark allocation continues to be the capital key, but we use the flexibility it offers us over time, across asset classes and jurisdictions.
DER SPIEGEL: What do you mean?
De Guindos: Above all, that, in the end, there will be a reckoning. We will ensure convergence to the capital key.
DER SPIEGEL: The ECB could, of course, simply extend the emergency program ad infinitum so that you would never have to demonstrate adherence to the rules because the final reckoning would never be performed.
De Guindos: I cannot foresee what will happen and therefore I cannot rule out extending the program. But we’ve clearly said that our pandemic emergency purchase program is temporary, and, under the current conditions, we have stipulated that the program will end in June 2021. Until then, we are using the flexibility we have.
DER SPIEGEL: How do you explain the boom on the stock markets? After the COVID-19 outbreak in Europe and the U.S., the markets slumped by more than 30 percent. They have since recovered their losses. How can that be?
De Guindos: There could be two factors at play: The measures promptly taken by the ECB and governments to cushion the economic impact of the pandemic generated some optimism. Until recently, the view had prevailed that the public-health pandemic had largely been brought under control. All this had a positive impact on the stock markets. But we also know that markets sometimes overreact, both downwards and upwards. At the start of the pandemic, we saw large drops in equity prices.
DER SPIEGEL: You believe, in other words, that the stock markets are overreacting and share prices will fall again?
De Guindos: I wouldn’t say that. It will depend on the evolution of the pandemic. Ultimately, stock markets must remain realistic. We are facing a recession in the euro area.
DER SPIEGEL: How is the mood at ECB headquarters? At the last meeting under former President Mario Draghi in autumn of 2019, a significant split within the ECB Governing Council became apparent, prompted by Draghi’s monetary policy. Now the situation seems more relaxed. Is the pandemic masking the divide?
De Guindos: The past is the past. And I think that Mario Draghi’s successor Christine Lagarde took office with the intention of listening to everyone. In Draghi’s times, 99 percent of all decisions were taken unanimously.
DER SPIEGEL: Yet that 1 percent when there was disagreement is decisive – such as in fall 2019, when the ECB suddenly resumed buying government bonds. And that was even before the arrival of the coronavirus.
De Guindos: There are always nuances. There are very knowledgeable people in the Governing Council who sometimes vote differently. But generally, the degree of agreement is enormous.
DER SPIEGEL: Does that also apply to the head of the Bundesbank, Germany’s central bank? The German government is currently taking a much looser approach to monetary policy and has reacted pragmatically to the crisis. Have you also noticed increased flexibility on the part of Jens Weidmann, the president of the Bundesbank and member of the ECB Governing Council?
“The Bundesbank is a very, very independent institution. I can assure you of that.”
De Guindos: The German economic stimulus package is very positive. Such programs are the first line of defense for minimizing the consequences of the pandemic. The German government’s response is the right one and Germany has the financial leeway to react quickly and intensively. I believe that a fiscal response is also necessary on a pan-European level. It’s not only about the size and scope of the program, but about the message. A European response makes it very clear that there is a response from the core and the heart of the EU. And that is politically very important.
DER SPIEGEL: What about the Bundesbank?
De Guindos: I don’t comment on the Bundesbank’s view. The Bundesbank has always taken a cooperative and positive attitude and made important and relevant contributions. The Bundesbank is a very, very independent institution. I can assure you of that.
DER SPIEGEL: As independent as Germany’s Federal Constitutional Court in Karlsruhe, which has accused the ECB of disproportionate and poorly communicated monetary policy. What next?
De Guindos: Our position is clear: We are a European institution. We are subject to the jurisdiction of the European Court of Justice and accountable to the European Parliament as well as to the European Court of Auditors. We have taken note of the judgment from Karlsruhe. Our monetary policy decisions have always been proportionate and appropriate. I expect that the German government and the Bundestag (Germany’s parliament) will react to this. We stand ready to cooperate with the Bundesbank and to provide information to facilitate the response that the German institutions have to give to the Constitutional Court. We are ready to cooperate, but always with full respect of our independence.
DER SPIEGEL: Meaning, it’s the Bundesbank’s problem?
De Guindos: That’s your way of saying things. Once again: We are under the control of the European institutions, but we are open to cooperating with the German institutions. That is the approach.
DER SPIEGEL: Why is it always the Germans who cause trouble?
De Guindos: I don’t think it’s the Germans who make trouble. You know, it’s the largest country in the euro area.
DER SPIEGEL: But Germany seems to have the biggest problem with the ECB’s monetary policy, and above all, they fear inflation more than other Europeans.
De Guindos: Inflation is well below our target. Germany’s growth rate has also been positive over the past 10 years. Germany has a very competitive economy, and the favorable euro exchange rate has also been positive. So I think the euro has been very beneficial for the German economy and that this is recognized by most Germans.
DER SPIEGEL: Should Jens Weidmann be more vocal in communicating this message? Because it doesn’t seem to have much resonance in Germany.
De Guindos: I cannot speak on his behalf. But when I listen to his remarks in the governing council of the ECB, I agree very often with his comments.
DER SPIEGEL: Wouldn’t it be better if the ECB focused its strategy much more strongly on growth rather than inflation, if only to end this eternal cycle of complaints about your monetary policy?
De Guindos: Our mandate is enshrined in European treaties. It has been decided by governments and parliaments, and we have no say. Whether the treaties and the mandate will be changed in the future is not known, but it certainly is not a matter for today.
DER SPIEGEL: As Spain’s former economy minister, you must have an opinion on such an issue.
De Guindos: I had other priorities then. We had a difficult time. The recovery of the Spanish economy was very important. So I concentrated on other types of issues.
DER SPIEGEL: As vice president of the ECB, you are responsible for financial stability and the banks. Are you sure that the banks in the Eurozone are strong enough to absorb credit defaults, which will certainly come?
De Guindos: European banks are, on average, in a much better capital and liquidity situation than 10 years ago. The problem facing European banks is that their profitability was very, very low even before the pandemic. This is clearly reflected in bank valuations on the stock markets. So, profitability is the real problem. And I think that the pandemic will make this situation even worse. Since the beginning of the crisis, the valuations of European banks have fallen by 30 percent. I think this also justifies the rapid policy responses to the pandemic.
DER SPIEGEL: What must the banks do?
De Guindos: Cut costs, reduce excess capacity and – for some of them – consolidate domestically and across borders. Much of what has already been necessary in the past is now completely unavoidable.
DER SPIEGEL: Is it true the ECB has set up a taskforce to look into the idea of creating a European bad bank?
De Guindos: We haven’t taken any decision or gone into any detail on this. It’s premature to have such a discussion.