European Central Bank (ECB) governing council member, Ewald Nowotny , sat down with FT Alphaville to talk Greece, exit strategies, speculation and contagion in the eurozone.
In addition to being an ECB member, Nowotny is also the head of Austria’s central bank, where he experienced some of the problems of European contagion first-hand last year.
In early 2009, central and eastern Europe (CEE) were widely regarded by markets to be on the tipping point of collapse. Austria’s banks were thought to be heavily exposed to the region, which meant they found themselves embroiled in the CEE situation as well.
Together with other European countries, Austria launched the Vienna Initiative, which committed banks to maintain their exposure to the CEE region in conjuction with help from the International Monetary Fund (IMF) and European Bank for Reconstruction and Development (EBRD). The move was widely judged to be a success and effectively stabilised the region in a relatively short amount of time.
Here’s a semi-edited transcript of the interview.
Q: I just wonder if that sort of solution [the Vienna Initiative] could be applied to Greece as well. I know the ECB’s been reluctant to call in the IMF but is there something similar that could be done?
A: (Laughing) Well, theoretically yes of course but it is an example of how international cooperation can work. But there are of course also market differences. First, Greece, being a euro country, is under the regime of euro regulations, and so the main policy approach is of course that they have to solve the problems themselves. Second, in most of the countries of the Vienna Initiative, the main problem was the deterioration of the exchange rate. So devaluation that would have caused problems for the banks … This is not a problem for Greece because Greece being a member of the eurozone, does not have an exchange rate problem. Greece has a public finance problem … So it is a bit of a different story, but in principle, of course some kind of cooperation might help – especially for the psychological effects. The really big success of the Vienna Initiative was that it gave assurance to all the investors that the situation was under control. In a very very short time the situation stabilised. So the important thing is to break the negative expectations, and I think this is the task for us, in the case of Greece.
Q: Do you have a game plan at the moment for how to do that?
A: (Laughing) I only can tell you what is the official situation, so that’s from the side of the ECB. [ECB] President Trichet said the ECB has been helpful , or the euro has been helpful to Greece anyhow because being a member of the eurozone meant that you had the advantage of low interest rates and that now it is the turn for the Greece authorities to restore discipline. And I think this is, in any case, the most important first step. One of the big problems with Greece is that obviously they do have a credibility problem after the statistics and all this kind of thing … After this first step there are a number of ways how you could do some cooperation with regards to structural funds.
Q: Is that sort of like a European monetary fund?
A: No. These are the structural funds for the improvement of the economic structure of the member countries. And Greece is, of course, getting structural funds to quite a large amount for expansion of the infrastructure and so on. One has to see that the Greek problems have a number of causes. One of the causes is, of course, that it [does not have] very stable fiscal policies, and the problem of losing competitiveness. The basic problem in Greece is the loss of competitiveness. The main point being development of wages in Greece, and so this is the task to restore competitiveness. There’s the task to restore fiscal stability. And all this of course has been aggravated by the economic crisis. It has two sides, let’s say the terminal side and it has also the external side, where there’s still the effect of the economic crisis. So I think there will be a number of measures that will have to be taken but the prime responsibility now clearly rests with the Greek authorities.
Q: Is there a point at which the ECB would perhaps, or the eurozone members, step in and do something a bit more…
A: This is different. The ECB have a clear mandate. [Under the statute of the ECB] we have a clear no-bailout clause. So the ECB as such cannot intervene. Whether there are some intervention from the side of individual countries, let’s say bilateral or some kind of concerted action, this is a political decision. But it’s not, with regards to the ECB. What is of course now in discussion is the question that the ECB for the time being, as part of our crisis prevention programme, we have lowered the quality requirements for collateral. And we have made the decision that this will be in place until the end of the year. Then of course, we’ll have to decide. But we must be very clear; the policy of the ECB is a policy that has to be oriented towards the totality of the euro area and we cannot take into account specific problems of specific countries, or specific banks. So our task is to look at the euro area and the needs of the euro area totality.
Q: So at the moment you’re still planning to normalise policy towards the end of the year?
A: Yes, the ECB has already started an exit programme but in a very cautious way. So we have a phasing out programme of some of the liquidity programmes – like the one-year operation. And we will do this step by step , always taking into account the economic situation. But the economic situation of the eurozone, as such, not of individual countries. But our policy is very clear, never to pre-commit. So that means we will review the situation whenever we can. At least every quarter…
Q: Does the central bank worry about contagion at all? I mean, it’s fine to say that Greece is one country, but once you throw Spain and Portugal in the mix, if those problems start exacerbating themselves then perhaps the eurozone economic picture will change?
A: Of course contagion is something that has to be taken seriously. But I think it is not founded in economic reality … For instance the Greek debt situation is quite substantially different from the one in Portugal and Spain. The situation in Portugal and Spain is much better compared to Greece. It is not, let’s say justified. The country that would be most in danger would be the UK, if you just look at the numbers. But there is no doubt, a lot of speculation around. So I heard yesterday, around here in London, talking with the bankers, it became quite obvious that hedge funds do play a role and this is something that I think one has to take seriously; and try to take some action against it.
Q: Is there anything the ECB can do about speculation?
A: No, the ECB cannot directly tackle speculation. But the ECB had, in the past, a very successful policy of a ‘steady hand’ approach – not really trying to give signals that could help speculation. But to have a very clear approach…
Q: While we’re on the topic of speculation, is the central bank comfortable with the current level of the euro?
A: Yes, the ECB has a price stability goal. Price stability being defined not as the exchange rate but the rise of consumer prices not above but close to 2 per cent. So this is the main policy goal. The ECB has no exchange rate goal … What we are interested in of course is to avoid abrupt developments. But as the exchange rate as it is just now, there’s no specific matter of concern. You know that there have been fluctuations in the euro dollar exchange rate from 1 to 1.50…
Q: Just going back to something you mentioned earlier about competitiveness gaps – is there a way the ECB can alleviate those going forward?
A: Well in some way the ECB is helping because being a member of the eurozone helps you to have lower debt levels – lower spreads for your public debt – than you’d have to pay otherwise. So this is a very important contribution, especially for the weaker countries of the eurozone. But the main impulse with regard to competitiveness is the wage-price policy in the countries concerned. So that means that there is the need for discipline in the labour markets and we do have of course, also, the huge amount of structural funds of the EU. That also should help to increase competitiveness.
Q: What do you think about the Spanish economy?
In Spain, it’s quite clear that it has been hit very hard by the economic downturn. And especially also with regards to the real estate developments, they had a kind of bubble in some markets. But Spain at least has to restore competitiveness … But the Spanish banks, at least the big Spanish banks, are in a very good position. In fact they’re playing a major role in the world markets, also the UK. And therefore, I see no immediate concerns with regard to Spain. As for the fiscal situation, yes they have a high deficit … but the debt to GDP ratio is I’d say, on average. So there is the threat of some speculative forces, but I don’t think they’re really founded.
Q: What’s the biggest challenge facing the eurozone at the moment?
A:I think this is quite obvious. The biggest challenge is to regain higher growth rates because the recession has ended in Europe. We are at the rate of positive growth but positive growth is still not really very high – between 1.5 and 1.7 per cent and basically to solve the problems of unemployment. But also to have a [solution] for the fiscal problems… To increase economic growth is the biggest challenge. This is something that cannot be achieved , what monetary policy, low interest rates, etc., can do with it, we did. Now it’s a matter of structural policies, of stability, both on the labour markets with regards to competitiveness. So this is for me, the number one challenge.
Q: You know there’s a rumour going around this morning that Trichet has flown back early from Sydney to go to some sort of meeting in Europe, and people are interpreting that as meaning there’s a bailout of Greece imminent.
A: (Laughing) Well, in any case I think his time is much better spent in Europe than in Sydney.